“Coverage that would be regulated as small group market coverage … if it were not sold through an association is subject to rate review as small group market coverage.” With that single sentence, the U.S. Department of Health and Human Services amended its recently adopted health plan rate regulations and preempted Washington State statutes and rules that regulate association plan rates as large group rates. As a consequence, some fear that association plan rates that insurers calculate based upon the association’s risk profile must be recalculated based upon the state’s small group population as a whole.

To gauge the potential impact of the new regulation, consider the federal agency’s own analysis:

“[W]e received comments from consumer advocates and State insurance officials citing a study concluding that two-thirds of the States regulate associations differently from other plans in the individual and small group market and about one-half of the States entirely or partially exempt coverage sold through national associations from State regulation.”

 As for allowing time for adjustment to these new requirements, the new rule is effective on November 1, 2011 and applies to rates that are filed on or after November 1, 2011 [page 7]. Washington associations should ensure that rates are filed before that date.

Clearly, the greatest interest in the HHS rules came from Washington Associations. Not surprisingly, the Washington Insurance Commissioner encouraged the HHS rules while the associations argued the merits of permitting Washington law to continue as it has for the past 15 years. As HHS noted,

 Three associations discussed the history of associations in their State and indicated that their State treats association health plans as large group plans not subject to individual or small group requirements for all purposes, not just rate review. These associations expressed concern about potential logistical and administrative burdens for association plans were they to be regulated as small group market coverage at the State and Federal levels. … In addition, all five commenters asserted that, because association health plans have a larger insurance pool, they should not be regulated the same as plans and policies in individual and small group markets. However, a regulator from the same State as three of the associations opined that successful implementation of the Affordable Care Act depended on having a stable health insurance market, which could be jeopardized if issuers could avoid the various individual and small group market requirements by offering coverage through associations.

For example, the Washington State Master Builders Association commented in July that:

 The practical effect of changing our Association/Trust rating status as established under Washington law by a rule interpreting federal law, would be an administrative and logistical nightmare. The MBA/BlA W Trusts currently have over 2700 different companies ranging in size from 2 employees to over 500 employees…If Washington State wants to change or amend their state law to bring Association/Trust plans within the definition of “small groups”, let them change the law through the legislative process.

In contrast, Northwest Health Law Advocates and Sprague Israel Giles argued for HHS preemption of Washington state law. Irrespective of the political and policy views on the value of these health care reforms, contemplate the impact of the HHS rules in Washington markets when considering the observations of these commentators:

Since 1995, when Washington State law exempted AHPs from small group underwriting and rate regulations, small employers have moved in large numbers to association carriers…

AHPs dominate the small-group insurance market in Washington, a trend attributable to AHPs’ ability to underwrite based on risk and group size. By joining an association and thereby constructively becoming a large group, small groups with lower risks are able to select based on price.  AHPs are able to offer plans that are more attractive to low-risk groups…

In 2010, Washington had 224,160 people enrolled in small group association plans and 242,775 in large groups, for a total of 466,935 in association plans

The result has been a greater concentration of high-risk small groups in the community-rated pools.  Low-risk groups seek association coverage because associations are not subject to community-rating standards, and therefore, they are able to obtain lower premiums based on the group’s heath status and, over time, the group’s claims experience.  In contrast, higher-risk groups are forced into the community-rated pools, increasing premiums for everyone in those pools.

In other words, the 466,935 people currently insured through association plans must share the losses of those who remain in the small group market and will pay higher insurance premiums. This financial impact comes at a time of high unemployment in a poor economy through a federal regulatory decision overturning a law adopted by the Washington State Legislature and continuously sustained over the past 15 years.

That’s what I love about federalism – a state insurance regulator successfully requesting the federal government to do what the state Legislature refused to do and a state court would not allow him to do by rule.

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