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Association health plans could boost captives, but hurdles loom

Association health plans could boost captives, but hurdles loom

The U.S. Department of Labor’s association health plan regulatory proposal could provide new opportunities for captives, but owners should tread carefully as the proposed rule may also add several layers of complexity from a compliance standpoint.

On Jan. 5, the department published a proposed rule to amend the Employee Retirement Income Security Act to make it easier for employers to band together and be treated as an employer sponsor of a single multiple-employer employee welfare benefit plan and group health plan under ERISA. The stated goal is to permit smaller employers to obtain better leverage and more flexibility in purchasing health insurance.

“This subject is very important, I think, for small employers in the U.S. who are struggling with health care costs and trying to comply with federal regulations,” Kathleen Waslov, senior vice president and senior resource consultant for Willis Towers Watson in Boston, said during Business Insurance’s Captives: Politically Speaking webinar Tuesday.

“The headline here is that the Department of Labor will allow associations in some cases to act as a single large employer for the purposes of ERISA and the Affordable Care Act,” she continued. “This can lead to cost savings for those employers and maybe more growth in the captive industry. We’ll also see that what’s not clear is whether state lawmakers will conform to the federal lawmakers and whether insurers will respond with better pricing.”

The definition of employer would change under the proposed rule as the current regulation requires the group to be a “bona-fide organization” with a business purpose unrelated to the provision of benefits to be treated as a large employer and includes industry and geography requirements, she said.

“Under the proposed rule, those requirements are loosened,” Ms. Waslov said. “The association can exist solely to provide health coverage. You can form a new association for simply this purpose. If you’re all working and buying benefits in the same metropolitan region, you can band together and qualify as a large group for purposes of ERISA. You get those benefits that you’re denied as a small employer under the ACA.”

But the association health plan must still be controlled by its employer members and the department will continue to require that the rating of the plan not be based on health status, meaning premium rates can’t be offered to one group, but denied to another group because it has an employee with a particular health condition, she said.

The rule change, if adopted, would provide several opportunities, including achieving economies of scale in the purchase of health insurance, Ms. Waslov said.

“Of interest to the captive industry is that this type of aggregation of risks makes an easier and a faster path to self insurance because you’re more likely to take on risk if you’re a bigger group and to link with captive programs that offer stop loss to self-insured programs,” she said.

But there are risks and challenges, Ms. Waslov said.

“You’re going to still need the scale,” she said. “You need a lot of lives to create enough credibility in a population to be able to predict, particularly excess layer medical claims. The plans will still be subject to state and (multiple employer welfare plans) regulations. Maybe one of the more interesting challenges is how underwriters in the health insurance and stop loss side of the industry respond? Will they decline to quote the group as a group?”

The captive insurance company can operate as a reinsurer if it’s properly licensed, meaning it would probably be issuing stop-loss coverage and not want to be in the first-dollar health insurance business, she said.

“There are probably more layers of compliance in a program like this than most captives we think about,” she added. “Complexity is driven by the layers of compliance to insurance and health care regulation, so I think the strategy is to wait and see what the (Department of Labor) decides based on the comments they’ve received and tread carefully in the formation of an association health plan and a related captive insurance company transaction.” 





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