Chapter 8: Health and Human Services
Create Fully-Insured Association Health Plans for Small Businesses
Summary
Almost three-fourths of Texas’ small businesses do not offer health
insurance to their employees. Such businesses cannot take advantage of the same
options that large businesses use to reduce their employee health insurance
premiums. State law should be changed to allow small businesses to form
fully-insured associations to acquire or issue insurance, giving them the
options already available to large businesses to reduce costs while preserving
adequate safeguards for health care consumers.
Background
Many employees of small businesses are uninsured. In 1998, about 38 percent
of employees in Texas businesses with fewer than 25 workers were uninsured,
compared to less than 18 percent in businesses with 500 or more
employees.[1] More than three-fourths of
Texas’ 366,000 small employers do not provide employee health
insurance.[2]
Federal law allows large companies to become self-insured—that is, to
offer their own employee insurance backed with their own resources, and to
control their costs by deciding what sort of coverage to offer. Small companies
cannot afford to cover risk in this way and do not have options available to
large businesses that would allow them to reduce their costs. Instead, they must
purchase insurance from insurance companies at rates higher than those paid by
large businesses. Furthermore, if even one or two of their employees incur high
medical expenses, those rates are likely to rise significantly, pricing small
businesses out of the insurance market entirely.
If small employers could join together to form larger risk pools, they could
minimize the sharp rises in premium costs that occur if several employees
experience high medical expenses. Such pools could negotiate volume discounts
from insurers and achieve economies of scale in administrative costs. In
addition, they would not not be subject to some federal and state mandates, such
as those requiring certain types of treatment or provider types to be covered,
and could have legal immunity from being sued under state common law, since
self-insurers can be sued only for claims for which they have contracted to pay.
Large companies that become self-insured are not currently required to meet
mandates and can avoid lawsuits. Small business pools level the differences
between small businesses and large businesses.
At the national level, the National Federation of Independent Business
(NFIB), an association representing 600,000 owners of small and independent
businesses that employ more than 7 million people, has proposed federal
legislation allowing the creation of association health plans (AHPs). AHPs,
which could be formed by groups of small business employers or employees, would
allow small businesses to expand their health care choices and lower their costs
by pooling their purchasing power. AHPs should encourage greater competition for
the small employer health insurance market.[3] An
AHP proposal has been passed in a House provision that would exempt AHPs from
most state regulations.
AHPs have been accused of presenting the same risks as the Multiple Employer
Welfare Associations (MEWAs).[4] In the past,
some MEWAs have gone bankrupt, leaving their members with unpaid claims, and
some have been used fraudulently, earning them a bad reputation with state
regulators.
Texas, however, could ensure the solvency of AHPs by enforcing stringent
solvency and reserve standards not required of MEWAs under federal law. The
plans would be called “fully-insured AHPs” because they would be
required to purchase standard group policies or to self-insure and purchase
reinsurance—a policy to protect the association from costs in excess of
its resources—to fully cover the costs of the plan.
If a consumer has a complaint about a claim under an AHP, they would call the
Texas Department of Insurance (TDI), which has regulatory authority over
state-licensed insurers including those that provide stop loss coverage and
third-party administration.
Recommendation
State law should be amended to allow groups of
employers or employees to form fully-insured association health plans (AHPs).
AHPs could choose either to purchase standard group health insurance or to
self-insure and purchase stop-loss or similar coverage to protect their
resources and their beneficiaries. Either option would demonstrate that they
were fully insured under federal law.[5]
To demonstrate that an association plan is fully insured, with the loss set
at zero percent, the association would have to demonstrate that:
- it has entered into a 100 percent stop-loss (or
similar coverage) agreement with an insurer licensed to do business in
Texas.
- the insurer is rated B+ or better by BEST (an
industry rating standard).
- the insurer providing the stop-loss coverage
possesses at least $25 million of policyholder or contributed surplus.
- the insurer providing the stop-loss coverage is
obligated under the agreement to serve as the third-party administrator
responsible for handling claims under the association plan.
- in the event the plan is unable to pay a claim
for any reason, the provider of the stop-loss coverage is directly liable to the
participant under its agreement with the AHP.
- the insurer providing stop-loss or similar
coverage for the AHP pays premium taxes on any and all consideration received
from the association for that agreement.
TDI would continue to monitor the solvency of the insurance company that
provides stop-loss coverage and acts as claims administrator as part of its
regular examination process.
Fiscal Impact
Premium taxes collected from plans currently insured would continue to be
paid on the stop-loss or similar coverage. While there could be some premium tax
loss attributable to the lower premium costs enjoyed by the AHPs, to the extent
that additional businesses would choose to provide insurance, premium tax
revenues could increase. The net effect would be expected to be close to revenue
neutral.
[1] Ken McDonnell and Paul
Fronstin, EBRI Health Benefits Data Book, Employee Benefit Research
Institute: Washington, D.C., 1999, p. 72; Texas Health and Human Services
Commission, “Estimated Distribution of Texas Uninsured Workers According
to Company Size in 1998,” (Handout prepared by Research Department, Fiscal
Policy Division, Austin).
[2] Texas Department of
Insurance, “Texas Small Employer Health Insurance Enrollment Statistics,
1993-1998,” Austin, Texas. (Handout.)
[3] National Federation of
Independent Businesses, “Health Care: Critical Point In Health Care Debate
Has Arrived!” September 18, 2000
(http://www.nfib.com/policy/index.asp?ContNF=take_action/healthcare/index.htm).
(Internet document.)
[4] “War of Words Heating
Up Over Managed Care Reform,” National Journal’s Congress
Daily (July 20, 2000).
[5] 29 U.S.C. § 1144
(b)(6)(A).
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