Industry experts Kirk Watkins, Phillip Giles, Norman Chandler and Jeff Kehler, discuss the new rule on association health plans and the potential impact it may have on the captive market
Industry experts Kirk Watkins, Phillip Giles, Norman Chandler and Jeff Kehler, discuss the new rule on association health plans and the potential impact it may have on the captive market
Phillip Giles
Vice president of sales and marketing
QBE North America
Kirk Watkins
Practice leader for captive insurance programmes
Trion Group, a Marsh & McLennan Agency, LLC Company
Norman Chandler
President
Arsenal Insurance Management
Jeff Kehler
Captive programme manager
South Carolina Department of Insurance
The White House and the Department of Labor (DoL) issued a final rule on association health plans (AHPs) in June. The reform allows AHPs to be treated as a large group health plan for the purposes of the Affordable Care Act, which it is hoped will allow them to obtain health coverage at a lower cost.
There is a suggestion that in the future a large number of AHPs may convert to a self-insured structure as this will allow them to capitalise on such a plan’s ability to preempt state insurance regulation and benefit mandates.
I spoke to a number of industry professionals; Kirk Watkins, practice leader of captive insurance programmes at Trion Group; Philip Giles, vice president of sales and marketing at QBE North America; Norman Chandler of the Alabama Captive Insurance Association and Jeff Kehler, captive programme administrator at the South Carolina Department of Insurance; about the AHP ruling and the future impact it may have on the captive market.
What are your thoughts and predictions on the association health plan rules by the US DoL?
Phillip Giles: I’m really underwhelmed by the final ruling. The rules, as originally proposed, represented some promise for expanding the structural options available for smaller to mid-sized employers for providing healthcare insurance to employees. What was delivered in the end was just a slightly more defined version of the status quo.
The final rules help define what entities are eligible to form and participate in an AHP, however, they also allow each state to continue regulating AHPs under their existing multiple employer welfare arrangement (MEWA) legislation. Instead of having a uniform set of regulations nationally, we are left with the same inconsistent patchwork from one state to the next.
There is also no mandate requiring any state to permit an AHP; and currently, only about half of the states permit MEWAs. The lack of sufficient continuity will create regulatory conflicts and inhibit the formation of multijurisdictional AHPs.
Jeff Kehler: The new legislation may be helpful to smaller, main street type employers who could not otherwise offer health coverage to their employees. However, this is not without concerns and risks. Some may argue the reduction in standards and more liberal rules afforded AHPs may destabilise existing insurance markets and offer an AHP an unfair advantage.
The AHP may not offer the essential benefits required by other plans and therefore may leave some employees without the benefits they need to treat certain diseases or conditions.
A safe prediction is many will begin to jump on this as an opportunity to be a first-in marketer. However, once it is determined how difficult it will be to construct an AHP, the enthusiasm will wane. It will be quite a long time before all the questions and issues are resolved.
A good analogy is between AHPs and employee benefits in captives. It seemed a great idea at the time, but it took forever to gain any momentum in the marketplace.
Norman Chandler: The new rule has created a lot of renewed interest in AHPs. We expect that there will be continued interest in AHPs by associations looking to provide new member services. The new rule is helpful for grouping independent contractors and grouping by geography.
However, I’m not sure that this rule goes far enough to allow for significant new AHP formations since the state-by-state regulatory system for MEWAs isn’t changed by the new rule.
If a state preemption comes about new year by DoL, then we’ll see tremendous growth in AHPs.
Kirk Watkins: Many individuals in the US benefited from the Patient Protection and Affordable Care Act, which was signed into law on 23 March 2010. More commonly known as the Affordable Care Act (ACA) and referred to as, Obamacare. The legislation for AHP will allow the formation of one large group from smaller groups of employers, associations, organisations, etc. These new groups would be permitted to be recognised, as one ‘employer’ for the purposes of underwriting, servicing and administration of medical coverage, much like an individual large employer group.
Previously, these smaller groups had no choice but to be fully insured. However, with the ability to be recognised as one large organisation, the group has several options to choose from, including, self-funded, self-insured or continue to be fully insured with a larger, potentially healthier pool. Choosing to be self-funded may lead to greater oversight by the members, which could potentially alter plan design to be less beneficial to the employees, which may impact the employees of these smaller organisations. The other point of view may be, those organisations which think highly of their employees, or face challenges in recruiting and retaining employees, may use the ability to customise plan designs as a way to enhance their plans and pass the benefits onto the employee.
Adversely, AHP’s may challenge the marketplace, through adverse selection. The ability of small employers and potentially self-employed individuals, to form a single healthcare group, may lead to the ‘survival of the fittest’. Signifying that the healthiest populations may band together, form an association and benefit by the lower risk associated with that group. However, this will directly affect the marketplace, as healthy individuals leave the fully insured pool, for a newly created, ‘healthiest and lower cost’ pool.
Certain challenges remain inherent in the medical marketplace. Even with these new larger groups, some claims like hepatitis, preemie babies, heart attack and serious accidents, could happen at any time. Being fully insured, these small groups currently do not retain any of the risk associated with those events. As they move forward and self-fund plans with other members, participants may experience catastrophic economic loss that is associated with unforeseen medical events. A series of these events may create significant negative loss, plan years. These significant losses may lead new members to reconsider their choice and potentially re-migrate to a fully insured scenario.
How will AHPs have a future impact on the captive market?
Giles: I don’t believe the final version of the rules will materially impact the captive market. However, the publicity surrounding the originally proposed rules have increased market awareness, and maybe curiosity, of MEWAs which may in turn generate some level of exploratory activity. I believe that some existing self-funded MEWAs may explore the possibility–through the formal feasibility process–of conversion to a single-parent captive. I don’t, however, expect widespread market impact resulting from the final rules.
Kehler: AHPs will give most state regulators serious pause for concern. First, it is a MEWA-like arrangement. This means states will have to figure out how to regulate them reasonably while still protecting the employee from the effects of a financial insolvency.
It is likely to be a long time before AHPs are prevalent in the insurance marketplace.
Watkins: Core medical coverage is not typically self-insured in the US, it is either self-funded or fully insured. This is primarily due to the economic benefits of not having to pay a premium tax when self-funding core medical coverage.
When core medical coverage is placed in a captive, the employer must add a premium tax to the cost of the programme. In the self-funded model, Carriers like Blue Cross or Aetna, act solely as a TPA and provide their network and services for an administrative services fee.
However, medical stop-loss for companies with a captive may be placed in the company’s captive. These groups can choose to retain all or a portion of the stop-loss risk and potentially insure only the catastrophic events. It is feasible to think, that AHP’s could increase the desire for new captives in the market which would serve as medical stop-loss captives for the AHP’s.
Chandler: Since the new rule leaves in place state regulation of AHPs, we think that domiciles have a tremendous opportunity to encourage new AHP formation. State laws vary significantly from state to state. This allows the captive domiciles to be creative in addressing the legacy MEWA issues.
Specifically, we think that Alabama offers an outstanding opportunity for innovation. The state laws on MEWAs aren’t overly burdensome and that allows even more flexibility in captive programme creation. We expect Alabama to be an exception, in that, we expect several new AHP formations there.
What challenges will AHPs cause for the captive market?
Giles: In terms of captive market implications, it’s important to understand that the typical AHP, will be comprised of a grouping of very small entities (and possibly even individuals) that are much too small to self-insure on their own.
Unless an AHP can attain a sufficient collective size and achieve the consistent track record of underwriting credibility and claims profitability required for self-funding, conversion to a captive structure would not be a viable consideration. Assuming an AHP can achieve a sustainable self-funded structure, it would still take about three to five years of experience credibility before conversion to a captive would be prudent.
Other significant challenges for a prospective AHP will be to first achieve ‘bona fide’ status as defined by the DoL final rules. To qualify, the group of employers must have a ‘commonality of interest’ such as being engaged in the same trade, industry, line of business or profession. The association must also demonstrate at least one substantial business purpose unrelated to the provision of health insurance coverage. According to the final rule, a commonality of interest standard is met if the association would be a viable entity in the absence of sponsoring an employee benefit plan.
There are a few options for self-funded AHP formation. New and existing employer groups that meet the qualifying ‘bona fide’ group standard, can establish an AHP under the DoL existing rules if they are in the same industry (for example, homogeneous) and within the same geographic location. Under the new rules, newly formed homogeneous industry groups can be formed and are not subject to geographic restriction. ‘Unrelated’ (for example, heterogeneous) AHPs can be considered for approval if membership is confined to within the same state or metropolitan area. Both types of groups must meet the ‘bona fide’ group standard.
In short, it will be easier for homogeneous groups, having a legitimate trade connectivity, to demonstrate the requisite ‘commonality of interest’ than for heterogeneous groups. The guidelines for demonstrating the ‘substantial business purpose’ needed to achieve the commonality of interest standard by the association seem ambiguous but could potentially be reached through the offering of association member services such as advertising, educational sessions, business conferences, and the like.
As I mentioned earlier, the lack of regulatory uniformity from one state to another will be a challenge to multijurisdictional AHP formation. The AHP rules, via the Employee Retirement Income Security Act (ERISA), preserve state regulation of MEWAs from regulatory preemption which extend to self-insured AHPs. Therefore, AHPs having employer-members in multiple states, such as those sponsored by national trade associations, could be subject to competing sets of state-level MEWA compliance regulations. The most likely option would be to form AHPs on a state by state basis within states permitting MEWA formation.
It’s also worth noting that the originally proposed rules would have allowed AHP formation solely for health plan sponsorship. I fully support the decision not to include that in the final rules as it helps prevent AHP formation by non-affiliated third-party programme managers not appropriately vested in long-term performance. Non-vested third-party sponsorship (and profiteering) was fairly prevalent in the early MEWA days of the late 1980’s and early 1990s and resulted in widespread insolvencies and tightened regulation.
Kehler: The major challenge is how to protect the employee from being harmed by a financial insolvency of the captive. A state may require a front company and lots of reinsurance before considering this arrangement. This structure may negate some of the benefits of using a captive because of cost and reduced efficiency.
Some states may have to change their captive legislation to enable the formation of AHPs using a captive insurer.
Watkins: Smaller groups may enter the AHP market and exit quickly, due to much higher than anticipated claims and/or the misconception that they could consistently experience lower claims cost, year over year. That, of course, may be true in some of the plan years, but not all. This may result in the those participants preferring the security and forecast ability a fully insured plan provides.
Chandler: The challenges are great. AHPs must comply with DoL, ERISA, and state laws in addition to captive laws in the domicile. There is an extensive knowledge base needed to put together an AHP programme that utilises a captive. In most domiciles, an AHP programme will require approvals of the MEWA programme and the captive programme. In most domicles, these approvals will have to be obtained from different divisions within the Department of Insurance.
Make no mistake, running an AHP requires experience with administering health plans. If you don’t have that experience, you should go out and get it if you want to create an AHP.
Another challenge includes the traditional skepticism of MEWAs by state regulators.
What opportunities will the rules provide?
Giles: I was cautiously optimistic that the originally proposed rules would lead to increased opportunities for groupings of smaller employers to participate in structural options typically available only to larger entities.
As I mentioned earlier, the final version of the rules is quite diluted and only seem to preserve the existing, fragmented, state-based MEWA structure that has been in place for many years; maybe with a bit more definition in terms of qualifying standards.
We have been working with several established self-funded MEWAs that have expressed an interest in converting to a single-parent captive, and I expect more existing MEWAs will consider the same option. If nothing else, the new rule process has increased market awareness of AHPs and MEWAs, which may lead to some new formations, however; I believe that this will only deliver moderate–much less than originally anticipated–impact within the self-funded market and will have even less impact in the captive world.
Kehler: It is difficult at this stage to predict what opportunities will arise from the legislation. At first blush, it seems a captive arrangement would make sense and offer additional benefits through reduced cost and greater efficiency.
However, there are so many unanswered questions that are fundamental to how an AHP will work, it is impossible to say if a captive insurer could be involved either as a direct insurer or a reinsurer. Only time will tell.
Watkins: The proposed rule changes may allow organisation like the Chamber of Commerce and trade organisations to band together and offer plans that may provide more robust coverage at a substantial savings, to the employees of smaller organisations.
In those geographic areas where the group can negotiate with a very limited number of providers, they may be able to create a plan that significantly reduces overhead and administrative cost, from the typical fully-insured level.
Chandler: The new rule greatly helps existing associations to more easily form health plans. Associations of mostly independent contractors, such as realtors, are now allowed to group together to form an AHP.
The new rule also allows grouping by geography. So the requirement to be of similar industry is no longer applicable. We expect that associations that promote causes in specific geographic regions to now form AHPs for their members.
In the past this members would have to be of similar industry to group together.
The new rule changes the status of AHPs to large employers which is a great help, too.
Innovative captive domiciles will also benefit from this rule. The more experienced domiciles will do better than others.
