United States

Health coverage for small businesses through Association Health Plans

Final guidance intends to make access to competitive pricing easier


In August 2018, a Department of Labor (DOL) final regulation (the Final Rule) became effective which expands opportunities for small businesses and sole proprietors to band together to obtain healthcare coverage for their employees. The Final Rule is designed to make it easier for small employers and sole proprietors to purchase competitive health benefits through Association Health Plans (AHPs). The Congressional Budget Office estimates that an additional four million individuals will enroll in AHPs by 2023.

Health care markets: Background

The size of a business determines the market in which it can buy health insurance. There are three market segments:

  • Individual market for sole proprietors and other one-person businesses
  • Small group market for employers with between 2 and 50 employees
  • Large group market for employers with more than 50 employees

In the U.S., almost all large employers provide group health coverage to their employees through health insurance policies or self-insured plans. However, only about one-third of businesses with fewer than 50 employees offer health insurance due to economic disadvantages in the marketplace. Large employers typically can provide better insurance at lower prices than small employers because they have a larger pool of insurable individuals for allocating risk and administrative costs. In addition, the Affordable Care Act (ACA) imposes requirements on health insurance policies sold in the individual and small group market which do not apply to policies sold in the large group market or to self-insured plans.

Under the ACA, policies sold in the individual and small group market must provide coverage for the ten essential health benefits, in addition to other requirements. These ten benefits are: (1) ambulatory patient services (outpatient services), (2) emergency services, (3) hospitalization, (4) maternity and newborn care, (5) mental health, substance abuse and behavioral health treatment, (6) prescription drugs, (7) rehabilitative and habilitative services and devices, (8) laboratory services, (9) preventive and wellness services and chronic disease management, and (10) pediatric services, including dental and vision care.  By contrast, policies sold in the large group market may provide essential health benefits, but are not required to do so. Consequently, the premiums for policies in the individual and small group market are often higher than in the large group market due to these factors.

One way for small businesses to pool their risks with other employers and reduce costs through economies of scale is by purchasing health coverage through association health plans. An AHP is a group health plan sponsored by an employer group or association to provide health coverage to employees of the employer-members.

AHPs have been around for decades and have traditionally formed along industry and geographic lines, such as through chambers of commerce, trade associations, and other business leagues. However, various administrative hurdles have hampered the formation and efficacy of AHPs.

Under prior DOL regulations, employers participating in an AHP often could not be aggregated and treated as a single employer for purposes of buying health insurance in the marketplace. Therefore, the employees of these employer-members could not be grouped together to determine whether the large group market rules applied. Instead, the DOL frequently looked through the AHP to each employer-member. Employer-members with over 50 employees would be able to buy health insurance in the large group market; however, employer-members with fewer than 50 employees would be limited to the small group market. In addition, sole proprietors were often not allowed to participate in the AHP.

In October 2017, President Trump issued an executive order directing the DOL to consider revising the regulations to expand access to health coverage by allowing more employers to form AHPs and be treated as a single employer in the health insurance marketplace. The DOL subsequently released its Final Rule this year in response to that directive.

New Association Health Plan requirements

The Final Rule contains several requirements an AHP must meet in order for the employer-members to be considered a single employer for health plan purposes.   

  • The AHP must be established by a bona fide group or association of employers that has a formal organizational structure with a governing body and by-laws. In addition, the employer-members must control the functions and activities of both the group or association and the health plan.  Consequently, a health insurance issuer cannot control the group or association or sponsor an AHP.   
  • The employer-members must have a commonality of interest, meaning that they either (a) share a common trade, industry, line of business or profession; or (b) share a common geographic locale. A common geographic locale exists if each employer-member has a principal place of business in the same state, county, city or metropolitan area. A metropolitan area can cross state lines, such as in the case of the New York or District of Columbia metropolitan areas.
  • The group or association must have at least one substantial business purpose unrelated to offering and providing health coverage (even if the primary purpose of the association is, in fact, to offer such coverage to its employer-members). A group or association is considered to have a substantial business purpose if it would be a viable entity on its own, even without sponsoring a group health plan. For example, a group or association would have a substantial business purpose if it (1) acts as a standard-setting organization that establishes business standards or practices; (2) engages in public relations activities such as advertising, education, and publishing on business issues of interest to its members; (3) works to advance the well-being of its industry; or (4) offers conferences, classes or other educational materials to its members.
  • Each employer-member must have at least one employee participating in the group health plan. With regard to sole proprietors and working owners in corporations or partnerships without employees, the owner is considered to be both the employer and the employee for purposes of participating in an AHP. To qualify, the sole proprietor or working owner must work at least 20 hours per week or 80 hours per month providing personal services to the trade or business, and have wages or self-employment income at least equal to the owner’s cost of coverage under the AHP.
  • Coverage under the AHP must be available only to current and former employees of employer-members, plus their spouses and dependent children. Furthermore, AHPs cannot discriminate against individuals with respect to eligibility, benefits or premiums based on any health factor. In addition, it cannot discriminate against an employer based on its employees’ health factors. However, AHPs can make distinctions between groups of individuals or employers due to employment-based classifications such as occupation or job function, full-time versus part-time status, geographic location, or other circumstances. Other consumer protections also apply.

AHPs in existence prior to the issuance of the Final Rule can continue to operate under previous guidance, or voluntarily choose to follow the Final Rule. New or existing employer groups or associations can establish fully-insured AHPs under the Final Rule on or after Sept. 1, 2018. Existing self-insured AHPs can start operating under the Final Rule on Jan. 1, 2019, and new self-insured AHPs can be established under the Final Rule beginning April 1, 2019. Like before issuance of the Final Rule, states can continue to adopt and administer their own regulations regarding AHPs, and the federal government intends to collaborate with the states in enforcement efforts.

For more information on AHPs, visit the Association Health Plans page of the DOL website.

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