SMALL BUSINESS HEALTH PLANS
by Roy Littlefield
TIA Executive Vice President

Working in a coalition with the Small Business Legislative Council (SBLC), a top legislative priority for TIA is passage of Congressional association health care plans (AHP). (An interesting side note is that my first boss at NTDRA, Philip P. Friedlander, Jr., was the first elected President of SBLC.) And in addition to that challenging effort, I am very excited to announce that TIA will soon release a defined health benefit plan as our newest membership benefit.

Prior to small business health care “reform” legislation enacted in most states in the early 1990s, TIA and most state association affiliates had strong association plans. Those plans provided health care protection for members, served as excellent recruitment and retention tools, and brought in significant and steady income streams through administrative and promotional allowances. Many state and national associations have been challenged financially for the past 25-30 years.

For the past few years, TIA has been developing a national defined health benefit plan – a low cost alternate health plan that allows you to offer basic benefits at very affordable rates. This program offers prescription drug benefits, dental benefits, vision and hearing discount plans, flexible spending accounts, life and accidental death and dismemberment insurance, short-term disability insurance, COBRA administration, and dependent and elder care. It is a great business opportunity to compare rates.

This has been a work in progress, and I could never adequately thank Bud Mullaney, Larry Morgan, Tom
Raben, Dick Gust, Bob Malerba, Paul Hyatt, Wayne Croswell, Paul Fiore, Colleen Wood, and Dr. Cardos for
their tireless efforts to bring this program to reality. If Congress passes AHP legislation, we will be way ahead of the pack and we can only improve on what we will already have. Once again, TIA will be active in the battle to secure the passage of legislation that would allow associations to again develop national plans. The concept is endorsed by President Bush.

When TIA members come to Washington for the June 12-13 TIA/AAIA Legislative Summit, we will focus on this issue, Right-to-Repair legislation, and amendments to the Petroleum Marketing Practices Act (PMPA).

STATUS
In the last two Congresses, the House of Representatives passed legislation that would create AHPs. However, despite the best attempts by Senator Mike Enzi (R-WY), this legislation was never considered seriously by the Senate. Now that Republicans are in the minority, the passage of this legislation is very unlikely. Even so, at the beginning of the 110th Congress, Congressman Sam Johnson reintroduced H.R. 241, the Small Business Health Fairness Act. Senator Enzi has also indicated that he will revisit the concept.

On the other side of the aisle, the new Chairman of the Senate Small Business Committee, Senator John Kerry (DMA), has indicated that he would like to work on the Democrat’s proposed alternative to AHPs, namely the Small Employers Health Benefits Program Act. This bill, which was introduced during the 109th Congress by Senators Dick Durbin (D-IL) and Blanche Lincoln (D-AR), would give small businesses access to the same range of health insurance companies as is currently available to federal employees.

BACKGROUND
The cost of health care is one of the most pressing domestic issues facing our country. The good news is, according to the Kaiser Family Foundation (KFF), the rate of increase in health insurance premiums in 2006 was at its lowest since the beginning of the decade. Premiums for employer-sponsored health coverage rose an average 7.7 percent in 2006, less than the 9.2 percent increase recorded in 2005 and the recent peak of 13.9 percent in 2003. However, this is quickly brought into context with the bad news. Specifically, premiums still increased more than twice as fast as workers’ wages (3.8 percent) and overall inflation (3.5 percent). Furthermore, over the past six years, premiums have increased an incredible 87 percent. Family health coverage now costs an average of $11,480 annually, with workers paying an average of $2,973 toward those premiums, about $1,354 more than in 2000.

The news is considerably more dire if one happens to work for a small business. Of the roughly 47 million American citizens who lack health insurance, nearly 60 percent are employed by small businesses. Furthermore, according to the KFF study, small businesses (defined in the study as those with 3 to 199 workers) have an average deductible of $465 for single coverage, as opposed to those who work for larger firms, who pay an average deductible of $260 for single coverage.

Clearly, this puts small businesses at a disadvantage. Interestingly, both sides of the aisle make the same
underlying argument. That is, in order to level the playing field and make health care more affordable for small businesses, the federal government should allow small businesses to band together to attain more purchasing power. The group purchasing provisions considered by past Congresses have at their foundation a number of goals:

• to improve the ease with which small employers purchase health insurance for their employees;

• to reduce the cost of health insurance plans offered in the small group market;

• to increase the number of workers in small firms who have health insurance; and sometimes,

• to increase the number of health coverage choices available to workers in small firms.

THE REPUBLICAN PLAN
The Republican bill, the Small Business Health Fairness Act, would establish a number of provisions that plans must include to become certified as Association Health Plans, or AHP’s, and would exempt such plans from state insurance laws and regulatory oversight. The provision would remove states’ authority to apply a large body of insurance laws and regulations including consumer protections, solvency and fair market practices, grievances and appeals procedures, premium taxation, and prohibitions on discrimination. Instead, the measure would establish the federal government as having the sole
regulatory authority over these entities except in the case of state laws that prohibit the exclusion of a specific disease from coverage, or relate to newborn and maternal minimum hospital stays, and mental health parity.

This bill would establish non-discrimination provisions that would prohibit AHP’s from rejecting less healthy applicants from coverage or targeting those individuals for higher premiums. Reserve and solvency requirements would replace states’ laws that would no longer apply. (Those provisions and the other requirements of the bill would be enforced by the “applicable authority,” sometimes the Secretary of Labor and at other times, the state agencies responsible for the regulation of insurance.)

Certified AHP’s would also include the following features:

• AHP’s must offer at least one insured health coverage option unless:

1. the self-insured plan existed before the date of enactment of the bill;

2. membership is not restricted to one or more trades; instead, employers representing a broad cross-section of trades and businesses or industries are eligible; and

3. the plan covers eligible participating employees in one or more of the high-risk trades (as listed in the bill).

• The association sponsoring the plan must have been in existence for at least three years and be operated by a board of trustees with complete fiscal control and responsibility for all operations.

• AHP’s must have at least 1,000 participants and beneficiaries, and have offered coverage on the date of enactment or represent a broad crosssection of trades, or represent one or more trades with average, or above average health insurance risk.

• All employers who are members must be eligible to enroll, all geographically available coverage options must be made available upon request to eligible employers, and eligible individuals cannot be excluded because of health status.

• Premiums for any particular small employer are prohibited from being based on the health status or claims experience of its plan participants, or on the type of business or industry in which the employer is engaged.

The bill would establish requirements regarding who may participate on the board of trustees for qualified AHP’s. The board may include owners, officers, directors, or employees of the participating employers or partners of the participating employer who actively participate in the business. Service providers to the plan may also be members of the board if they constitute not more than 25 percent of the membership of the board and do not provide services to the plan other than those on behalf of the sponsor. The bill would also establish an “Association Health Plan Fund” from which the Secretary of Labor (or applicable authority) would make payments to ensure continued benefits on behalf of AHP’s in distress. The fund’s activities would be financed by annual payments made by AHP’s.

ENZI’S FIVE PRINCIPLES
Senator Enzi outlined the following principles as the basis for his legislation:

1. Association-based plans should have the opportunity to harness the advantage of independent pooling and play a commercially meaningful role in the coverage marketplace, and if that puts market pressure on insurers, so much the better. At the same time, however, the coverage provided to association members should be subject to underlying regulatory and consumer protection requirements substantially comparable to those applicable to all entities offering similar coverage.

2. The current hodgepodge of varying state health insurance regulations should be streamlined,
thereby easing administrative and regulatory costs, and facilitating a larger number of plans in more states. Under such an approach, states would be encouraged or required to adopt common sets of rules in targeted areas of health insurance regulation, such as rating and underwriting, though state oversight and enforcement authority would remain.

3. Individuals and businesses should have the opportunity to purchase lower-cost plans that are free, or largely free, of state benefit mandates. Though most purchasers will likely choose fuller coverage, it is important to assure that lower-cost alternatives exist as a safeguard for those who are struggling at the margin.

4. Primary responsibility for most insurance oversight and consumer protection should remain with the state insurance commissions – including the right to assess health plans, including association health plans.

5. The focus of immediate efforts should be on policies that do not require significant federal outlays.

ANALYSIS
Opinions about the potential impact of AHP’s on the small group insurance market span the continuum of
possibilities. Advocates for AHP’s view removing the state regulatory barriers and creating federal standards as ways to encourage the growth of pooling options. By releasing multi-state pools from the regulatory burdens of each state in which enrollees reside, these provisions would increase the options available to small employers who want to offer health insurance as a benefit but cannot. In addition, some
argue that the increased risk to small firm coverage could become spread across larger groups of employers making health insurance as accessible to workers in small firms as to those in large firms. Most importantly, their supporters say that releasing AHP’s from most state benefit mandates will allow those groups to offer more affordable, slimmed down benefit packages that may be desirable to workers who are now uninsured.

Opponents raise concerns about the impact the legislation would have on adverse risk selection in the small group markets and the solvency of plans, and about the Department of Labor’s (DOL) ability to ensure that enrollees are protected from enrolling in fraudulent or inept plans.

Insurers naturally have incentives to select the most favorable risks among the individuals or groups that are seeking coverage while rejecting others. While the goal of insurance is to spread risk, policies or practices that allow beneficial risk selection have the opposite effect. This risk selection concern is raised regarding AHP’s because of the provisions exempting AHP’s from state laws mandating that certain benefits be provided by plans, limiting and defining how policies are to be priced, and defining fair marketing and business practices. All 50 states have such laws, many of which are intended to maintain well-spread risk in the small employer insurance markets. Opponents fear that AHP’s would attract healthier firms since firms with sicker employees would not want plans that exclude the state mandated benefits and protections. If AHP’s attract predominantly healthy small firms out of the traditional small group market, firms with less healthy employees could face even higher premiums. A risk selection spiral could become activated, to the detriment of those left outside of the AHP’s, and firms with sick employees would be especially at risk.

The bill tries to address the concerns about risk selection by including provisions that discourage AHP’s from actively pursuing healthier employee groups and rejecting or discouraging higher risk groups from joining. The bill would prohibit discriminatory membership policies and plan pricing based on health status of employees or their dependents. It would also prohibit AHP’s from requiring that member employers purchase health coverage through the AHP. The bill restricts self-insured health plans from becoming qualified AHPs. However, self-insured plans that existed prior to enactment would be grandfathered in. The bill would also prohibit a participating employer from providing health insurance coverage in the individual market for any employee excluded from the AHP which is similar to the coverage provided under the AHP; if such exclusion is based on a health status related factor and such employee would otherwise be eligible for coverage under the AHP. Finally, it would require AHP’s to offer their plans to all employers who are eligible to participate and also require, upon request, that any employer who is eligible to participate be furnished information regarding all available coverage options.

Some consumer advocates and state regulators fear that those provisions may not be enough. The provisions, they say, do not provide for the fair marketing rules and patient protections as established by the states. Moreover, their concerns relate not only to the ability of AHP’s to reject higher risks, but also to the incentives that encourage certain small firms to sort themselves into AHP’s versus insured plans, such as the ability of AHP’s to offer trimmed down benefits.

Opponents cite Congressional Budget Office (CBO) estimates that 20 million employees and dependents, 80 percent of workers in small firms, would face rate increases and 10,000 of the sickest people would lose coverage while overall enrollment in employer-sponsored health care would increase by only about 330,000. Opponents also believe the AHP legislation would preempt traditionally state-regulated areas such as solvency requirements, consumer protection rules, benefit mandates, and certain ratings laws. The proposal would place self-funded AHP’s under the jurisdiction of the DOL. Opponents claim the DOL lacks the funding and manpower needed to regulate AHP’s.


THE DEMOCRAT PLAN
The main cornerstone of the Democrat bill, the Small Employers Health Benefits Program Act, is the creation of the Small Employers Health Benefits Program (SEHBP), which is named after the Federal Employees Health Benefits Program (FEHBP). This bill would instruct the Office of Personnel Management (OPM) to administer this program and it would be open to any small business with 100 employees or fewer. Those small business employers who wish to join the program must enroll all of their employees, meaning that no employee could opt out of coverage or receive alternative coverage.

Businesses with low-wage workers, defined as those making $25,000 a year or less, would be eligible for refundable tax credits if the organization pays at least 60 percent of the workers’ premiums. By offering a refundable credit, this plan would allow those businesses that paid little or no taxes in a year to still receive assistance to help pay their employees’ premiums. The tax credits would equal 25 percent of the premium for single workers, 30 percent for couples with no children, and 35 percent for family coverage. If an employer decides to pay for more than 60 percent of the premium, they would become eligible for “bonus” tax credits.

PARTICIPATION
Employees will be allowed to join the program either upon being hired or during an annual open enrollment period. OPM will provide employers with a booklet that details all the insurance plans available prior to the annual enrollment period. Employees will be able to choose from a wide range of options according to their need. Employees who choose to enroll in an SEHBP plan will not face a pre-existing condition waiting period, provided they have at least six months of health insurance coverage immediately prior to enrollment. As a safeguard to prevent people from waiting until they get sick to enroll, health plans will be allowed to exclude coverage for pre-existing conditions for up to six months for people without coverage immediately prior to enrollment (reduced by one day for each day of immediately previous coverage).

One of the main points of contention Democrats had with the Association Health Plan legislation pushed by Republicans last year was that AHP’s would preempt important state insurance rules. Under the Durbin/Lincoln bill, SEHBP enrollees would be covered by state consumer protection laws, such as benefit mandates and solvency standards. State insurance commissioners would continue to regulate solvency, grievance processes, internal review and network adequacy laws. Additionally, like in the FEHBP program, OPM would have the authority to require plans to limit enrollees’ annual out-of-pocket expenses.

INSURANCE COMPANIES
A common problem with most broad insurance plans is the prospect of small businesses with large numbers of sick workers joining the SEHBP in order to take advantage of the guaranteed rates, while those businesses with healthier workers deciding not to join, instead choosing a different plan that offers a better deal because there is less risk in insuring their workers. This problem is commonly referred to as adverse selection.

The Durbin/Lincoln bill contains several provisions that are designed to avoid this or a similar scenario. The first provision is a “risk corridor” system, which would be similar to the Medicare Prescription Drug bill. The system is designed to limit the profits or losses prescription drug plans would incur if their costs are lower or higher than estimated. The risk corridor would work in the following way:

At the end of the calendar year, the Department of Health and Human Services (HHS) would compare each plan’s expected and actual benefit costs, which would be estimated by the insurers at the beginning of the year. Drug plans incurring benefit costs that exceeded their expected levels by a sufficient degree would then be partially compensated by additional federal payments, whereas drug plans with benefit costs that fell far enough below their expectations would generally have to reimburse Medicare at the same rate. Because a plan’s expected costs would determine the total amount they were paid up front, the risk corridor system also would help keep payments in line with actual costs while giving plans a residual incentive to control those costs. This provision will allow drug plans to better gauge their costs without the fear of large financial losses.

The other provision that will protect drug plans is the establishment of a reinsurance pool that will initially protect participating insurers from unexpectedly high claims from individual beneficiaries. The reinsurance pool would pay 90 percent of an individual’s costs when claims exceed $50,000. To help finance this program, OPM would receive a budget of $18 billion over the next 5 years to fund a “reinsurance” program for SEHBP plans with enrollees whose health costs exceeded $50,000 in a year. OPM would set the reinsurance payment amounts based on what the $18 billion budget permitted, but it could not exceed an 80 percent payment rate. The $18 billion fund would also be used as a reserve for the risk corridor arrangements.

In short, the risk corridor reinsurance and reinsurance provisions are designed to encourage health plans to join the SEHBP and provide them with a couple of years’ experience in order to accurately base their premiums. More importantly, these provisions are only effective for the first two or three years after the bill’s enactment. This will provide the insurance companies with a safety net, but not a permanent crutch.

ANALYSIS
Supporters of the Democrat alternative believe it has several critical advantages over its Republican counterpart. The first advantage is that it creates a much larger insurance pool that would be better able to lower administrative costs and negotiate lower rates through enhanced bargaining power. They believe the Republican alternative creates several association-based small business plans which would effectively lead to diminished bargaining power.

The Republican plan also does not provide a health insurance tax credit to small businesses, while the Durbin/Lincoln bill, as noted above, would provide a tax credit to employers on behalf of low-wage workers. Furthermore, this bill provides a reinsurance pool that would cover most of the high cost claims; the Republican plan has no similar provision.

Opponents of this bill cite concerns with creating a vast new federal program. As with those who oppose universal coverage for individuals, they are concerned with making small businesses dependent on the federal government for their health care. They point to the legislation’s large price tag, which is estimated to cost American taxpayers $73 billion over the next 10 years. And that number is only the beginning number. Like with the other health reform proposals, the concern is that once the program is run by the federal government, it will only be a matter of time before new mandates are added, resulting in increased costs and decreased options for citizens.

OUTLOOK
Any legislation dealing with small business health plans that has any chance of seeing floor action will now most likely originate in the Senate. As control of the Senate is now in the hands of the Democratic Party, this means that the Durbin/Lincoln bill is the new starting point. However, Senator Durbin is holding off introducing the bill, as he is seeking input from the small business community and his fellow Senators in order to make improvements that will make the bill more palatable to enough Republican Senators to overcome the 60-vote threshold for a filibuster. TIA will continue to monitor and report any new developments.