Proposed federal legislation establishing Association Health Plans (AHPs) could substantially disrupt California’s small group health insurance market without significantly reducing the number of uninsured, as intended, according to two new reports funded by the California HealthCare Foundation (CHCF).

The first report, What Would Association Health Plans Mean for California? (and a companion issue brief) analyzes the impact of the legislation on consumers, employers, and the insurance industry.

The legislation (H.R. 660 and S. 545) would permit trade and professional associations to offer federally licensed health insurance plans to small groups and other association members. These plans would be exempt from California insurance regulation and consumer protections and instead operate under the supervision of the U.S. Department of Labor.

"The criteria for offering an AHP would permit insurance companies to market these plans to small groups with healthier employees. The remainder of the small groups — still subject to California’s regulations — would likely be comparatively sicker, driving up their average premium rates," said Mila Kofman, who co-authored the report with Karl Polzer.

"Though AHPs could save some employers and their workers money because they would operate under less rigorous regulations, AHPs would also expose consumers to increased risk and create an imbalance in the market because traditional insurance plans would be operating at a competitive disadvantage," Polzer added.

Currently, California law requires insurance carriers offering small group insurance to employers to protect consumers in several ways. Although some provisions of the proposed AHP legislation remain unclear, AHPs would likely not be required to comply with existing rules, which include:

• Guaranteed issue: Insurance carriers that market to any small group (2 to 50 employees) must offer all coverage options to all small groups, regardless of risk or employee health status.
• Guaranteed renewal: Mandatory renewal of policies with the same benefits, regardless of the level of a group’s medical claims or health status.
• Rating restrictions: Limits on an insurer’s ability to charge small groups with sicker employees a higher rate than groups with healthy people.
• Benefit mandates: Inclusion of required benefits, such as maternity care, home health care, and many others. Kofman and Polzer’s conclusions were confirmed by a companion report developed for CHCF by the non-partisan Urban Institute.

  Simulating the impact of AHPs on the market, this study — The Effects of Introducing Federally Licensed Association Health Plans in California: A Quantitative Analysis — found AHPs would create winners and losers among consumers. The healthier groups entering AHPs would likely obtain lower cost coverage (an average of 14% lower) while those remaining in traditional insurance plans would likely see increases of 5%, on average. The net result would be no reduction in the number of uninsured Californians.

  Kofman and Polzer also point out that as AHPs attract the lower risk groups, it might be difficult or impossible for some small businesses and their workers to obtain affordable coverage. "It’s clear that small businesses are desperate for affordable alternatives. It’s also clear that this bill is not a magic bullet and will not help many small businesses," said Kofman. Other potential impacts of the proposed AHP legislation include:

• Managed care companies specializing in HMO products would likely have difficulty competing against AHPs.
• Consumers receiving coverage from AHPs might be at an increased financial risk due to federal health plan solvency standards that are less stringent than state standards.
• Diminished state oversight could increase consumers’ exposure to unauthorized companies selling phony health plans.
• Adding AHPs to the mix of an already complicated health insurance market in California would make the regulatory structure more difficult for consumers to navigate. The full reports and a companion issue brief are available online through the link below.

  Mila Kofman, J.D., is an assistant research professor at Georgetown University’s Health Policy Institute and Karl Polzer is an independent health policy analyst and researcher based in Washington, D.C. The Urban Institute report was conducted by Linda Blumberg, Ph.D. and Yu-Chu Shen, Ph.D.