SOI Online Extra: The Argument for AHPs

According to a May 2004 article by ConsumerAffairs.com, only 65 percent of small businesses (firms with 3 to 199 workers) offered health insurance in 2003. Moreover, 17 percent of workers who were offered health insurance by their employers chose not to enroll because they couldn’t afford to pay their portion of the premiums.

In an industry where staffing is a challenge, being able to offer insurance coverage can help small business owners attract and retain more employees. But as rate hikes roll in to the 20-percent range, fewer employers are able to offer health insurance coverage and many companies that do offer such benefits temper the cost by having employees pay a portion of the coverage. To help alleviate this problem, U.S. Senator Olympia J. Snowe (R-Maine), Chair of the Senate Small Business Committee, is promoting legislation (S.545 – the Small Business Health Fairness Act of 2003) she introduced to establish national Association Health Plans (AHPs) – an effort advocated by the green industry. Snowe’s bill would give association members more coverage options and potentially lower rates in the health care arena.

“AHPs are the most feasible means to bring small businesses more health insurance choices by fostering greater competition in a marketplace that is failing to serve the legions of our nation’s most important employers,” Snowe says. “Approving AHPs will not provide a miracle cure for the crisis of spiraling health care costs in America. It will, however, give small businesses the same insurance options enjoyed by large employer and union employers.”

HOW AHPs WOULD WORK. As it stands, small businesses have few affordable health insurance options, with five or fewer insurers controlling at least three quarters of the small group market in most states, according to the General Accounting Office. This lack of competition has led to steep rate increases and a rise in the number of uninsured companies. AHPs, however, would introduce more competition into the insurance market, thereby lowering rates, explains Senator Snowe.

Through AHPs, associations in an array of industries could work with insurers to create industry-specific health plans with just the right benefits for their members. For a given association, this set of benefits would be sold nationwide to any association members who choose to join. Moreover, businesses that belong to more than one association buying into AHPs would have that many more options available.

The Congressional Budget Office estimated that small businesses obtaining insurance through AHPs could experience premium reductions of 13 to 25 percent – between $1,000 and $1,900 for the average family health plan offered by small businesses. This is by virtue of the fact that AHPs would create more competition among insurers, and associations would essentially benefit from “buying in bulk” by insuring potentially thousands of members, rather than just a few employees from a small business.

Additionally, AHPs will help small businesses lower their administrative costs because, by operating under federal law, AHPs can avoid the costs of complying with 50 different sets of state benefit mandates. A January 2003 report by the Small Business Administration shows that administrative expenses for insurers of small health plans make up 33 to 37 percent of claims, compared to 5 to 11 percent of claims for large companies’ self-insured plans. Such costs under AHPs would run a small business only 13.5 percent.

WHAT’S HOLDING IT BACK.  National AHP legislation has already won approval in the House as HR 660 – a nearly identical version originally sponsored by former Congressman and now Governor Ernie Fletcher (R-KY).  According to the Senate Small Business Committee, the legislation is more than 10 years old and has been adjusted and refined since it was first introduced.

Having passed in the House of Representatives twice this session, the bill has consistently stalled out in the Senate. By and large, this is a result of opposition from large insurance companies, which have, in some cases, threatened to withdraw their support form local chambers of commerce that choose to support AHPs. Likewise, large insurance companies that agree to cover small businesses may be the only one of their kind in a given state or region. These firms have consequently opposed the legislation in order to maintain their status as the sole insurance provider for their area.

Additionally, some AHP opponents have described the legislation as a revenue boost for the associations. However, the bill outlines that, under the Employee Retirement Income Security Act, revenue from the plan must stay within the plan and go to the benefit of participants, either in the form of lower rates or more benefits. Moreover, arguments that associations would not be regulated regarding how much AHP rates would increase annually are countered by the notion that AHPs give associations another method by which to recruit new members. This puts little incentive on associations to increase rates and even if rates did go up, as is the nature of insurance, association members who choose an AHP would always start off with lower baseline premiums by virtue of being part of a larger group.

Snowe and other proponents of AHPs stress that the cornerstone of AHP legislation is to provide small-business owners with more options regarding health coverage. Members of associations need not buy into an AHP if they become available, but the availability of more options would allow business owners to make more beneficial choices in the future.