Association Health Plans have the potential to make the market for health insurance more competitive and to help reduce the number of uninsured Americans.

Insuring the Uninsured by Creating More Insurance Options. The needs of small employers vary to some degree with the size of the firm and definitely by the composition of the firm's workforce. The one-size-fits-all packages often offered to small employers do not allow the employer to access a health plan that fits the particular needs of the firm's employees. The same is true in the market for individual insurance.

To address this problem, members of Congress (Bilirakis, 2002; Whitfield, 2002) as well as representatives of industry (Wilson, 2002) have noted the need for a health insurance market that is more responsive to individual purchasers, small businesses, and their employees.

Migrant workers have different workplace needs than do accountants. Construction firms with all-male crews have different needs than do all-female service workers. Different employers have special needs that require custom health plan options. Large insurers have typically not served these needs very well, nor have they been responsive to the changing circumstances of very small employers.

The potential to increase the number of healthy people who obtain insurance is indicated by the experience of Medical Savings Account (MSA) plans under the federal government's pilot program. These are high-deductible plans combined with a savings account (the MSA). Individuals who have such plans spend from their MSA and out of pocket until they reach the deductible, with the plan typically paying all costs above the deductible. Because people get to keep (in their MSA) all the funds they do not spend, they are rewarded for being prudent, careful buyers of health care. Evidence shows that MSA plans significantly increase the perceived value of health insurance for healthy, uninsured people. In fact, the Internal Revenue Service recently estimated that 73 percent of all the people who have obtained an MSA plan were previously uninsured. Currently only about 100,000 people are enrolled in tax-favored MSA plans (Internal Revenue Service, 2002). The spread of these plans has been delayed by cumbersome restrictions and regulations, but their success to date illustrates the tremendous untapped potential of allowing the market to meet consumer needs in innovative ways.

"AHPs would give small firms the bargaining power of large companies"

AHPs would also afford small firms the economies of scale and bargaining power that large companies now enjoy (Fletcher, 2002). This is important because the Department of Labor estimates that six of 10 Americans without health insurance are in families headed by someone working for a small business (Chao, 2002). As Rep. John Boehner, Chairman of the Subcommittee on Employer-Employee Relations of the U.S. House of Representatives (Boehner, 1999), points out:

AHPs allow small employers and the self-employed to band together voluntarily in associations to form multiple employer groups. Under this concept, these large groups could self-insure or fully insure, gaining all of the advantages of pooling including greater economies of scale and lower costs. The result could be a 'rising tide that lifts all boats.' Small employers who now cannot afford coverage could offer it to their uninsured workers. States may benefit by having fewer people on Medicaid or dependent on state high-risk pools.

Insuring the Uninsured by Lowering the Cost of Basic Insurance. As noted above, many of the uninsured are healthy and can afford to purchase health insurance. The principal reason they are uninsured is that the premiums charged are too high relative to the value they place on being insured. The most important key to inducing them to become insured is to lower the price of insurance. There are three principal reasons why healthy people have been priced out of the market. As explained below, Association Health Plans offer a partial solution for all three.

First, in most health insurance markets the healthy are overcharged so that the sick can be undercharged. In some cases this occurs because it reflects the traditional pricing philosophy of such organizations as Blue Cross Blue Shield (Goodman, 1980). In other cases, state law effectively creates cross-subsidies and cost shifting.6 In either case, there are two bad consequences: (1) the healthy who are overcharged respond by underinsuring or by not buying insurance at all, and (2) the sick who are undercharged overinsure - thus driving up the average cost of insurance even more.

Second, guaranteed issue laws in the small group market (in every state) and in individual markets (in a few states) force insurers to take all comers, regardless of health status. This means that people can avoid costly premiums while they are healthy, secure in the knowledge that they can buy insurance for a reasonable price after they get sick. Of course, as more healthy people act on this incentive, the remaining pool of people who are insured at any point in time will become sicker and therefore more costly.

Third, regulatory burdens discussed below increase the cost of insurance, and these burdens have a larger impact on the individual market and on small firms than they have on large firms.

Association Health Plans cannot solve all these problems. They do have the potential to avoid some of the costs, however. They also have the potential to lower other costs. By one estimate, small employers pay 18 percent more for health insurance than large employers (Fletcher, 2002). By allowing small and large employers to purchase insurance in much the same way, AHPs can reduce that difference.

Overall, small employers (and their employees) are the first to be priced out of the market by cost increases, and they will be the first area of expansion if those costs can be lowered (Turner, 2002).

"There are more than 1,000 health insurance mandates among the 50 states."

Insuring the Uninsured by Avoiding Costly Mandated Benefits. Mandated health insurance benefits are state regulations that require insurers to cover specific services and specific providers. Currently, there are more than 1,000 such mandates among the 50 states. Mandates cover services ranging from acupuncture to in vitro fertilization, from mental health care to cosmetic surgery. They cover providers ranging from chiropractors to naturopaths. They cover bone marrow transplants in New Jersey, clinical trials in Virginia, hairpieces in Minnesota, marriage counseling in Connecticut, and pastoral counseling in Maine (Laudicina, Losleben and, Walker, 2001).

In many cases, benefits mandated by state governments are already included in the richer health plans of larger employers. These benefits often would not have been included in plans sold in the individual and small group markets, however, because buyers in the latter markets would typically prefer lower premiums in order to acquire basic coverage (Mills, 2002; Baumgardner, 2000). Mandated benefits in these markets create additional costs that must be borne by those who have no market power or negotiating clout.

"Mandated benefits price healthy people out of the market."

Mandated benefits raise the cost of insurance and price otherwise healthy people out of the market. In fact, studies estimate that as many as one out of every four uninsured Americans has been priced out of the health insurance market because of mandates (Goodman and Musgrave, 1988; Jensen and Morrisey, 1999). The impact has been especially severe for small business (Keating, 2002; Close, 2002), for agricultural communities (Nelson, 2002), and for minority populations, including Hispanics (De Posada, 2002).

The author has reviewed scores of testimonies of employer groups, institutions, and specialists before both the U.S. House of Representatives and the U.S. Senate. The testimonies make compelling arguments regarding the heavy and unnecessary burden of state mandates. These are credible witnesses representing large sectors of our economy, especially small businesses. They are unanimous in their position that mandates cause great harm.

If mandates do so much harm, then why do they exist? Very few mandates have been enacted because of patient pressure. Almost all are the result of the lobbying power of special interest providers, including doctor groups. Nevertheless, in an unexpected but welcome move, an American Medical Association study (Carpenter, 2002) indicated support for AHPs and for exemption from state mandates, premium taxes, and small group rating laws. The report states, in part:

Therefore, the AMA supports federal legislation enabling the formation of alternative means of pooling risk in order to increase individual choice of coverage and cost consciousness. Some alternative prototypes already exist in the form of association health plans (AHPs), consumer-directed health care arrangements, and some Internet-based health insurance companies. In addition, the AMA supports legislation allowing individuals to "buy in" to state employee purchasing pools … Businesses are increasingly interested in AHPs as a way to control costs and [in] consumer-directed health care options as a way to allow their employees to control their own health care decisions. In addition, creative alternative insurance pools would be encouraged by exempting them from selected state regulations regarding mandated benefits, premium taxes and small group rating laws, while safeguarding state and federal patient protection laws. [Emphasis added.]

There is no question that most state mandates are beneficial to specific persons for specific situations. The paramount question is whether they should be forced on others. Small employers could offer bare-bones packages or plans with minimal state mandates that satisfy the basic needs of employees and are affordable. Such benefits as drug rehabilitation, mental health care, and treatments for chronic ailments or long-term disabilities could be covered in a supplement to an employer-provided plan and paid for by the employees on an optional basis.

Small employers should be concentrating on making a quality product at a reasonable price. It is unrealistic to expect them to also function as a "mini insurance company" on site to serve the social welfare functions demanded by special interests and the government. The choice of benefits, however, should be the prerogative of the employer and the employees or of the employer acting as agent for the employees.

In order to serve the needs of purchasers of insurance, the Department of Labor should encourage AHPs to design plans with basic major medical benefits and few or none of the special benefits currently mandated by the states. AHPs could use a managed care network with limited access to specialists, reasonable and appropriate waiting periods for qualification, and affordable monthly premiums (lower than premiums for individual coverage outside the group). Alternatively, they could provide an indemnity plan with a fee schedule and lower the costs even further. They also could take a Medical Savings Account approach. Such plans could be designed to attract relatively healthy young workers. The AHPs' ability to avoid costly state mandates and sell lower-priced insurance to healthy uninsured people would help overcome much of the damage caused by unwise regulation.

"AHPs can sell lower-priced insurance to healthy uninsured people."

Insuring the Uninsured by Avoiding Other Regulatory Burdens. Unnecessary state regulations add costs to employer health plans, and they may add legal fees and administration costs. This is especially true for small employers (Langer, 2002), who often must hire consultants to ensure compliance with the sometimes conflicting state and federal regulations. AHPs would have state regulation preemption, thus resulting in savings significant enough to make the difference between affording and not affording a health plan. [See the sidebar on the Small Business Administration report.]

For example, state regulations that require prior rate approval are costly and time-consuming and are often administered unfairly and unwisely. Rate hearings may last six to nine months and require that the insurer be represented at least by an attorney and often by specialists in order to present an effective case before the administrative judge or regulatory agency. This often results in opportunities lost and restrictions on the management of resources. AHP preemption from this type of regulation would yield significant savings, which could be passed along to the firm's employees. It would allow the insurer to respond quickly to changing circumstances, controlled by competition and market forces rather than by a political body.

"Regulation often gives larger companies a competitive advantage over smaller companies."

Regulations also burden such large insurers as Blue Cross Blue Shield. However, large insurers may oppose unwise regulation less vigorously and may even perceive it as a source of competitive advantage. John Graham, Administrator, Office of Information and Regulatory Affairs, Office of Management and Budget, explains it this way:

Large corporations… oftentimes see regulation as an opportunity to raise capital costs for participants in an industry and to create entry barriers for new companies into those businesses.

That leads to the key finding of the Crain/Hopkins Report commissioned by the Small Business Administration. Firms with less than 20 employees face 60 percent larger regulatory burdens per employee than firms with greater than 500 employees. So I think it is important to realize that… larger companies, in certain circumstances… see [regulation] as a competitive advantage relative to small companies. [Emphasis added.]

Insuring the Uninsured by Avoiding the Costs of Unfair Taxes. AHPs would be preempted from taxes on the premiums of their health plans. Taxes on the premiums of individually purchased insurance and employer health plans are a source of general revenue for the states. Large self-funded employers and their employees do not pay this tax, nor do enrollees in Medicare and Medicaid, nor do state employees. Virtually the entire burden of the tax on health plan premiums falls on the most defenseless part of the market - where people pay the tax through higher premiums. The revenues from these taxes often go into the general revenue funds of the states and are spent on projects that have nothing to do with the health of the citizens. In other cases, the revenues are used to fund the state's high-risk pool. Even though the goal of the risk pool is to insure more people, the burden of accomplishing this socially important task is not shared equitably. The taxes are clearly a form of regulatory discrimination against individuals, the self-employed, and employers of small business.

The small employer joining an AHP would not be subject to the premium tax and would therefore be able to use those resources to hire more people and/or increase benefits to existing employees. With more affordable rates, more people would either purchase their own insurance or enroll in their small employer's health plan.

Expected Results. The case for offering lower-cost health plans to individuals, the self-employed and small business is strong. Perhaps the most important argument for AHPs is that millions of people who are not covered because of high costs or lack of availability would be able to obtain affordable coverage. The Congressional Budget Office (CBO) analysis of legislation pending in Congress estimates that small businesses can expect to reap savings averaging between 9 percent and 25 percent of the cost of their health insurance premiums. As a result, the CBO estimates that 330,000 - and potentially as many as two million - of the currently uninsured would obtain health insurance (Baumgardner and Hagen, 2000).

"AHPs could insure approximately 4.5 million workers and dependents who are currently uninsured."

Some experts believe that the CBO study underestimated the number of persons without health insurance that would be covered if the Association Health Plan legislation is enacted (Wilson, 2000; Talent, 2000; Joensen, 2000). Mark Joensen of CONSAD Research Corporation estimates that the creation of Association Health Plans would result in an increase in employer-sponsored insurance coverage of approximately 2.3 million workers and 2.2 million dependents (Joensen, 2000).