This article will focus primarily on the identification and understanding of the varying health risks and costs of association health plan (AHP) groups and how best to align premium to these relative costs. While pricing is not the only risk that can have an adverse impact on AHPs, managing it is a key pillar to the long-term sustainability of these plans.
The DOL rule on AHPs
The final rule on association health plans was approved and implemented on June 19, 2018, by executive order, and communicated via the U.S. Department of Labor (DOL). The main purpose of these plans is to provide a platform where similar employers, including single-life owner-employees, could pool their healthcare costs and risks to provide health benefits to themselves and their dependents. The main objectives would be to find more affordable health insurance coverage for small employers, without some of the benefits mandated by the Patient Protection and Affordable Care Act (ACA). The main tenets of the rule are as follows:1, 2
- Employers may come together under a looser definition of commonality, such as industry or region.
- These AHPs do not need the previous definition of being bona fide associations to form health plans.
- Single-life employer groups, often referred to as employee-owners or self-employed groups, are permitted to enter an AHP.
- AHPs do not have to offer ACA-compliant plans.
- Nondiscrimination practices would be in effect for these new AHPs. Primarily, varying premium or declining coverage based on health conditions is not permitted.
- Premium can vary by other acceptable risk classes, such as group size, area, or industry, for example.
It is important to note that the U.S. District Court for the District of Columbia (D.C.) has recently ruled invalid and vacated some key tenets of this new rule.3
AHP risk management considerations
To bolster the chance of long-term success for these new AHPs, active risk management of their plans is necessary. Certain key areas need to be considered and will require specific attention and monitoring, such as member engagement, pricing strategies, and funding arrangements.
MEMBER ENGAGEMENT AND LACK OF ENGAGEMENT
Low or unstable enrollment in an AHP leads to unstable costs and a greater probability of misaligning premiums to costs. Having an AHP that offers a full array of benefits, ranging in price and coverage, is essential. The AHP will be able to reach a broader spectrum of risks by offering plans that cover all the metallic tier coverage levels, at appropriate price points. However, it is important for these plans to maintain minimum value levels to avoid the financial burden of any catastrophic claimants.
Proper selection of networks can also be key in promoting interest and engagement. A strong provider network, along with quality case management, disease management, and wellness activities, can keep members engaged and invested in the plan. At the same time, this can help in keeping large claims volatility from breaching target loss ratios.
An AHP can consider plan participation requirements of member groups that could increase plan enrollment and reduce volatility. A balanced employee contribution schedule, one that varies by plan design, can help strengthen bonds between members and the plans offered.
PRICING AND MANAGEMENT OF RISKS
Strong pricing, funding discipline, and a clear vision of pricing methodology is essential to the financial health of an AHP.
- The AHP should implement a pricing structure that resembles the expected AHP characteristics that it is intended to cover. For example, if the AHP is only covering employers in Columbus, Ohio, and does not anticipate material differences in cost in the area, then it does not necessarily have to vary premiums by geographic location.
- Another recommendation would be to have a monitoring system that revolves around the quantification of risks and the distribution of these risks among the plan members, to gain an understanding of potential sources of financial strain to the plan. It is important to quantify the dispersion of risk, either by demographic scores, or a risk-adjusted score such as Milliman Advanced Risk Adjusters™ (MARA™). This dispersion of risk needs to be grouped by pricing class, whether it’s by plan, age/gender, or some other permissible class. While the AHP is not allowed to underwrite or discriminate by these health-based risk scores, it can at least get an idea of how its risks are dispersed.
- Overall, steps should be taken such as defining new risk categories that are more aligned with anticipated costs. For example, premiums will vary by plan offerings. They can create segments of relative experience when a broad array of plans are offered. Healthier and/or younger lives may choose the cheapest, less rich plan. The AHP could realign premiums based on plan design to rehabilitate a pricing segment that may be overheating.
- The next step would be to incorporate historical performance among these pricing classes. Groupings of similar risks could be acceptable as long as the premium for each price class is aligned with its expected relative costs and operating within reasonable loss ratio ranges. However, if certain price classes are causing an overall strain on funding, and too much increase is needed from other risk classes, it can set off a risk spiral, and the plan can never collect enough premium from the remaining risks to cover future costs.
Consistent monitoring of plan performance in this way is essential to the ongoing sustainability of an AHP. As described above, this identification and quantification of potential risks with appropriate triggers and corresponding action items can aid in preventing the start of severe misalignment of premium and rising loss ratios.
PRE-FUNDING AND ONGOING FUNDING
It would be irresponsible of a newly formed AHP, especially if it is self-funded, to not have additional capital on hand to buffer against adverse claims risk. Having a stabilization reserve, or a claims fluctuation reserve, is crucial to help reduce the impact of events such as underpricing of plan costs and higher-than-average rate increases in the future. The quantification of these anticipated risks, either by historical experience or by a risk-adjusted score, can help determine the amount of additional capital that may be needed in an upcoming plan year.
An appropriate mechanism to generate additional capital or surplus would be to charge an additional premium to all AHP member groups, based on a percentage of premium or a per capita basis, for example. This additional premium would be based on the expected risk characteristics of the AHP and could be charged equitably across all member groups. Once a reasonable surplus is established, future funding would only be necessary if surplus levels drop below an established point. Having an adequate surplus does not necessarily reduce the chance of underpricing in a given year, but it does provide a valuable source to absorb this impact.
AHPs have received recent skepticism from critics and been challenged by the courts, but interest in forming them will continue under the new rule. Time will tell regarding the long-term success of this new rule and whether it achieves its intended goals. However, the association health plans that have the strongest probability of success are the ones that install the strongest pricing and risk management controls and methods, as outlined here.
This article first appeared in the October 2019 issue of Health and Group Benefits News and Developments.
Update: The U.S. Court of Appeals for the District of Columbia Circuit is currently hearing arguments on the legality of this rule. This appellate court will decide whether to uphold or reverse the earlier ruling by the U.S. District Court that vacated key tenets of the rule.
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1 The final rule can be found here: https://www.federalregister.gov/ documents/2018/06/21/2018-12992/definition-of-employer-undersection-35-of-erisa-association-health-plans. 2 The DOL addresses frequently asked questions here: https:// www.dol.gov/general/topic/association-health-plans#FAQs. 3 For more detail on this ruling, see: https://ecf.dcd.uscourts.gov/cgi-bin/ show_public_doc?2018cv1747-79. 4 Plans with actuarial values of 60% or higher, meaning the plan will cover at least 60% of all health costs, on average. This is known as a bronze plan. 5 Some states may require additional capital or reserves for self-funded AHPs, in the form of, for example, actual cash or cash equivalents, a line of credit, or a surplus note.