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March 13, 2003
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Good afternoon, Chairman Johnson, Ranking Member Andrews,
and members of the Committee. Thank you for inviting me to discuss the
Administration's initiatives to expand health insurance coverage, and
specifically our support for Association Health Plans (AHPs) to increase
coverage offered by small employers. This hearing is especially appropriate
during Cover the Uninsured Week. I commend the Committee for holding a
hearing on AHPs – a proposal that is directly responsive to the need to
increase access to affordable quality health insurance.
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I am testifying before you today on behalf of the
Employee Benefits Security Administration or EBSA, formerly the Pension and
Welfare Benefits Administration. EBSA is the primary agency that will be
overseeing AHPs. Our new name reflects the Bush Administration’s
commitment to improved public service by making the agency more recognizable
to those we serve. We want to enable Americans to better identify the
federal agency that assists them in understanding and receiving their
employment-based benefits, including health insurance. With this tradition
in mind, I am committed to making effective oversight and enforcement of
AHPs a top priority for EBSA.
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More than 41 million Americans lack health insurance, and
fully 85 percent of the uninsured are in working families – with most
working at firms with fewer than 100 employees. In fact, workers in small
firms and their families comprise 60 percent of the working uninsured. To
increase health insurance coverage, the President has proposed a
comprehensive reform agenda that includes tax credits for the purchase of
individual coverage, expansion of the availability of medical savings
accounts (MSAs), greater access to state-based high-risk insurance pools,
medical malpractice reform, and AHPs.
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As we all know, a great deal of work needs to be done,
and I applaud the leadership of this committee for focusing on the health
care needs of small employers and their employees. I especially want to
thank Chairman Johnson and the bipartisan supporters on this committee for
your leadership on AHPs. I look forward to working with you to pass this
important legislation.
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Although most working Americans receive health insurance from their
employers, small firms with fewer than 100 employees find it particularly
difficult to offer benefits. Just 49 percent of these small businesses offer
insurance, compared with 98 percent of larger firms with 100 or more
employees. The picture is especially troubling at “low-paying small firms”
(defined in a study as firms with fewer than 100 employees where more than
half of the employees earn less than $9.50 per hour) where only 34 percent
offer insurance to their employees.
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The difficulties that small businesses face in trying to offer quality,
affordable health insurance explain a significant part of America’s
uninsurance problem. Small firms employ 42 percent of all workers. Yet these
workers and their families comprise 60 percent of the working uninsured.
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We know that small employers want to offer health insurance to their workers
and their families. Among 600 small businesses responding to a recent
survey, less than one-third currently offer insurance, but about
three-fourths said they would be "very" or "somewhat
likely" to participate in an AHP that offered lower prices, more
choices, or less paperwork. Small business employees also value health
insurance. According to a recent survey, health insurance was ranked as “very
important” by 89 percent of small business employees. AHPs can help make
coverage a reality for more small businesses – the challenge we face is
how to make AHPs a reality.
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While tax credits, MSA expansion and other policies will all help increase
coverage, AHPs are aimed squarely at the gap in coverage among small
businesses. In order to understand how AHPs will expand coverage, it’s
important to understand the economic and market barriers that prevent many
small employers from offering coverage today.
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Cost is clearly the biggest barrier for small employers
that want to provide health insurance. For a variety of reasons, insurers
typically charge small firms more per employee than large firms for
comparable coverage. Small company premiums are 20 percent to 30 percent
higher than those of large self-insured companies with similar claims per
covered employee. Cost drivers include small businesses’ administrative
overhead, insurance company marketing and underwriting expenses, adverse
selection, and state regulatory burdens. Small firms are likely to offer
less generous benefits and more of their premiums are consumed by
administrative costs. Furthermore, small firms’ lack of market power
increases their vulnerability to insurance fraud.
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In addition, small employers’ costs are rising more
rapidly than those of larger employers. Total costs per employee increased
by 18.1 percent at firms with 10 to 500 employees in 2002, compared with
11.5 percent at larger firms.
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Employees in small businesses bear the brunt of these
cost increases, according to a recent survey by the Blue Cross Blue Shield
Association (BCBSA), the Employee Benefit Research Institute (EBRI), and the
Consumer Health Education Council. Of the businesses that changed their
health benefits, 65 percent increased workers' copayments and deductibles,
30 percent raised the percentage of premiums paid by employees, and 29
percent cut back on the package of benefits offered.
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Rising health insurance costs are a significant barrier
for employers to hire workers and keep their businesses afloat. According to
a recent Conference Board poll of 120 chief executives, health insurance
costs were cited as the greatest impediment to adding workers in 2001 and
2002. Almost 82 percent of 1,017 members surveyed by the Connecticut
Business and Industry Association in 2002 said rising health insurance costs
were "an important factor" in decisions about whether to add
workers. In April 2002, the Small Business Association of Michigan
commissioned a poll on the impact of rising health care costs on small
businesses. They found that nearly a quarter of all small business owners
(and 40 percent of women and minority-owned businesses) fear the high cost
of health insurance would force them out of business.
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Employer Expenses: When a small firm decides to
offer health insurance, it must undertake numerous administrative tasks,
including identifying available insurance policies; comparing their prices,
benefit packages and other features; assembling plan descriptions,
enrollment materials and other forms; and educating and enrolling its
workforce. Small firms must pay for these activities with typically fewer
resources than large firms, and the cost of these activities for each
covered employee is higher.
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Insurance Company Expenses: According to the
General Accounting Office , insurers incur higher costs when providing
health care coverage to small employers than to large employers. Insurers
must market and distribute their policies to a very large number of
unconnected employers. They typically must compensate agents for each small
policy sold or renewed. Some costs, such as the cost of collecting detailed
medical histories for purposes of medical underwriting, are layered on each
time an employer changes insurers – and smaller employers generally tend
to change insurers more frequently. Indeed, between 1995 and 1997,
businesses with fewer than 10 workers were seven times as likely to drop
coverage as the average business, and about 4 times as likely to add it.
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Underwriting: Under current law, many small employers face higher
premium costs based on insurers’ underwriting practices. In underwriting
an insurance policy, the insurer estimates its cost to insure the employer’s
workforce by looking at the group’s demographics, past claims experience,
health status and other factors. Small groups have few participants among
whom to spread the risk, and, as a result, a few unhealthy workers or
dependents will skew the claims experience and may cause the employer to pay
much higher premiums.
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Faced with high premiums and limited budgets, small employers often share
the costs with their employees. In the worst-case scenario, healthy workers
will balk at higher costs and may not accept the offer to purchase
insurance, thereby either obtaining private individual coverage or joining
and increasing the ranks of the uninsured. When healthy workers give up
health insurance sponsored by a small employer, only higher-risk individuals
remain, leading to a predictable spiral of ever-increasing premiums and
declining coverage as the insured group becomes less and less healthy. The
small-group market is particularly vulnerable to this perilous outcome.
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State Regulatory Burdens: Some state laws further impede small
employer coverage. Because some states have been very aggressive in
regulating small-group markets, many insurance carriers have withdrawn from
those markets, leaving employers with little choice in plan design or cost
options. Five or fewer insurers control at least three-quarters of the
small-group market in most states. In some states, insurance for certain
small firms is available only through a state-operated risk pool or from one
insurance carrier.
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Additionally, small employers are sensitive to the cost of state benefit
mandates (such as requiring coverage for hair transplants, or treatment
provided by acupuncturists) that drive up the cost of the small group
coverage. Such mandates are responsible for one of every five small employer
decisions not to offer coverage. Another study reported that mandates raise
premiums by four to 13 percent, and that up to one-quarter of uninsured
Americans lack insurance because of state mandates.
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Vulnerability to Fraud: Small employers are also
especially vulnerable to health insurance fraud – scams that promise
low-cost health coverage, but fail to deliver. Many of these arrangements
are multiple employer welfare arrangements (MEWAs). MEWAs are arrangements
that provide health benefits to employees of two or more unrelated
employers who are not parties to collective bargaining agreements. MEWAs
are subject to a complex mix of state and federal laws and regulations.
While many MEWAs operate successfully and provide reliable benefits,
unscrupulous promoters have exploited MEWAs’ complex regulatory and
oversight structure to operate Ponzi schemes that collect premiums but
intentionally default on benefit obligations. Fraud increases the cost for
everyone, and the fear of being taken in deters many small employers from
offering coverage at all. AHP legislation will help protect against this
type of abuse.
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Let me take this opportunity to focus on the Department’s
current efforts to combat health insurance fraud. AHP legislation will help
address this serious problem by providing an attractive, cost effective
alternative to fraudulent health plans that is certified, regulated, and
closely monitored by the Department of Labor.
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The Department combats health insurance fraud through
both education and enforcement. By educating small employers, we can alert
them to ways they can protect themselves and their employees from fraudulent
health insurance schemes. The Department also devotes significant resources
to enforcement efforts. Our efforts have been effective in closing down
fraudulent health plans and, in many cases, recovering money for their
victims.
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Education and Outreach: Through our outreach,
education and assistance programs, EBSA has made educating small employers a
top priority.
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EBSA provides guidance to small employers on how they can
avoid purchasing health coverage from fraudulent MEWA operators. In an
effort to educate small businesses about these risks, Secretary of Labor
Elaine L. Chao recently wrote to over 80 business leaders and associations
requesting them to distribute and follow simple tips drafted by EBSA,
entitled “How to Protect Your Employees When Purchasing Health Insurance.”
These tips, which are also highlighted on EBSA’s website, offer important
warning signs for small businesses to consider about coverage that is “too
good to be true.” Checking simple information can alert small employers to
fraudulent schemes. We encourage interested small employers and employees to
visit the EBSA website at www.dol.gov/ebsa or call EBSA’s toll-free
hotline at 1.866.444.EBSA (1.866.444.3272) for further information about
protecting themselves against fraud.
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EBSA also has published technical assistance materials
for employers and service providers. Materials include a publication
explaining current federal and state regulation of MEWAs, and guidance on
what to do when health coverage offered by a MEWA is lost. EBSA has also
issued numerous advisory opinions to assist state prosecutors and regulators
in the enforcement of state insurance laws against MEWAs.
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Enforcement: In addition to education efforts, EBSA continues to devote
significant resources to enforce existing health laws and to work with state
insurance departments and the National Association of Insurance
Commissioners (NAIC) to protect workers and their families. In particular,
EBSA is actively investigating and litigating issues connected with abusive
MEWAs. Our primary goals are to shut down such scam artists quickly, to
appoint independent plan fiduciaries in order to protect plan assets, and to
recover money for victimized workers.
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To combat MEWA fraud and corruption, EBSA has implemented a two-pronged
approach using both its civil and criminal enforcement authorities. As a
result of our civil enforcement efforts, the Department achieved monetary
results of almost $9 million in FY 2002, which helped strengthen the
financial integrity of MEWAs or helped pay benefits for innocent victims
Most of the criminal MEWA investigations have been jointly conducted with
other agencies including the Department’s Office of the Inspector General,
the FBI and the United States Postal Inspection Service. As of March 12,
2003, EBSA was pursuing 116 civil and 25 criminal investigations of alleged
fraudulent health plans.
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Examples demonstrating the level of fraud perpetrated by unscrupulous MEWA
operators are numerous. In one recent prosecution, EBSA obtained court
orders to shut down an abusive MEWA called Employers Mutual, LLC, sixteen
related entities, and the individuals who operate them. Employers Mutual
offered health benefits in all fifty states and the District of Columbia,
with over 22,000 individuals enrolled in its plans. After collecting over
$14 million in employer premiums, Employers Mutual paid less than $3 million
in claims. Nearly fifty percent of the contributions were diverted to the
personal accounts of the principals and to pay administrative expenses.
Through our timely enforcement actions, an independent fiduciary was
appointed and the court approved an orderly method of resolving unpaid
medical providers’ claims in order to protect the plan participants from
being pursued by the health providers. Criminal sanctions are also being
pursued.
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With this background on the current small business health insurance market
and EBSA’s enforcement activities, let me now describe the advantages of
AHPs. In an AHP, the current market and financial barriers that face small
businesses would be reduced or eliminated. Small businesses would enjoy
greater bargaining power, economies of scale, administrative efficiencies,
and the benefits of a uniform regulatory structure, giving them more access
to affordable coverage.
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An AHP is basically an arrangement where a group of small
employers join together through a bona fide association to purchase or
provide health insurance coverage for their employees, under the protective
umbrella of ERISA. In essence, AHPs would give small employers many of the
economic and legal advantages currently enjoyed by large employers.
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Bargaining Power and Economies Of Scale: By
grouping small employers together to purchase coverage, AHPs will be able to
act more like large employers and offer lower cost coverage to employers,
employees and their families. If the AHP chooses to purchase insurance, it
will be in a better position to negotiate with insurers regarding the terms
and costs of coverage than a small employer acting individually. AHPs will
also enjoy economies of scale in the administration of plans. They will give
insurers a vehicle to market and distribute policies to many small employers
at once. By offering a well-selected and potentially stable choice of
policies to members, AHPs can help slow small employers’ otherwise costly
movements from one insurer to another.
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Streamlined Regulation: AHPs will allow small
businesses to enjoy the benefits of a uniform regulatory system. For AHPs
that offer fully insured coverage, state insurance commissioners would be
responsible for the solvency of the insurance company issuing the policy,
just as they are responsible for insurance policies issued to group health
plans today. It should be emphasized that under the current legislative
proposal, the states will continue to play a vital role in making AHPs work.
The goal of AHP legislation is not to undermine the states’ authority to
ensure insurer solvency or consumer protections; the goal is simply to allow
AHPs to operate uniformly on a nationwide basis, without having to comply
with the requirements of 50 different regulatory systems. Fully insured AHPs
would purchase insurance products with solvency standards and consumer
protections regulated by the states.
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AHPs that offer self-insured coverage will be subject to
a single, effective, national certification, solvency and oversight process
that will be administered by the Department of Labor. Strict standards would
be met to ensure solvency and protect consumers and there would be no
confusion or uncertainty over whether the states or the Department of Labor
regulate certain aspects of the entity.
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Pooling Risk: AHPs would help ensure that small
employers will not be denied insurance coverage or be priced out of the
market due to the health of their employees. As a member of a bona fide
association, even an employer with high claims experience would be offered
the same coverage options as those offered to other employers within the AHP.
Large AHPs can spread the risk of insuring unhealthy groups or individuals
among a larger population of health risks.
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Broader Choice of Coverage: Associations will be
able to fashion coverage that best meets their members' needs, even choosing
to offer more than one plan. By offering broader choices, AHPs will
encourage small businesspersons who are currently uninsured to purchase
coverage and pay into the premium pool. Given the current number of
uninsured small business workers and dependents, this broadening of the risk
pool will exert downward pressure on health insurance premiums.
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Cost Savings and Increased Coverage: Small businesses obtaining
insurance through AHPs could enjoy significant premium reductions. According
to the Congressional Budget Office (CBO), the average savings would be at
least 9 percent and could be as much as 25 percent per employer. CBO further
estimates that, because insurance will be more affordable, as many as 2
million Americans will be brought into the employment-based health insurance
system. Indeed, CBO’s predictions may be too conservative. A study by the
CONSAD Research Corporation foresaw larger gains, estimating that up to 8.5
million workers and dependents could gain coverage from AHP legislation.
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Wide Availability and Greater Access: Numerous small business groups
are eager to offer coverage and look forward to enactment of AHP
legislation, including organizations such as the National Federation of
Independent Business, United States Black Chamber of Commerce, United States
Hispanic Chamber of Commerce, Women Impacting Public Policy, American Farm
Bureau, and dozens of groups representing small businesses and
professionals. The Small Business Survival Committee (SBSC), representing
nearly 100 existing associations and employer groups, believes that coverage
will increase dramatically. According to the SBSC, “AHPs will empower
America’s small employers with the tools needed to harness their
entrepreneurial spirit and skills in providing working families with more
health benefits, and more health plan choices, at affordable prices. “ The
American Society of Mechanical Engineers (ASME) looks to AHPs to help make
health coverage more affordable for 19,000 of their members in nine states
who have no access to the ASME group health plan due to the high cost of
mandated benefits.
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EBSA has firsthand experience dealing with group health
plan regulation, as well as combating insurance fraud. EBSA administers
the Employee Retirement Income Security Act (ERISA), protecting
approximately 2.5 million private, job-based health plans and 131 million
workers, retirees and their families. Of these, 275,000 plans covering 67
million individuals are self-insured, and therefore subject exclusively to
EBSA oversight. In addition, self-insured multiemployer plans (established
and operated jointly by a union and two or more employers) are overseen
exclusively by EBSA. These plans cover more than 5 million participants,
not counting their covered dependents.
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Certification and Oversight: To ensure that unscrupulous promoters
would not operate AHPs, only bona fide trade or industry associations that
have been in operation for at least three years will be allowed to sponsor
these arrangements. EBSA will examine AHP sponsors and certify them if they
meet this standard, as well as tough solvency and membership requirements.
Certification is a “stamp of approval” signifying to small employers
that an AHP will provide reliable, affordable health insurance coverage.
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To combat fraud, Federal certification demonstrating that
legitimate and financially sound sponsors operate AHPs would provide small
businesses with the assurance that the Department of Labor has determined
that the organization offering coverage is a financially secure and reliable
operation. We will take that responsibility with the seriousness it
deserves. Certified AHPs – both self-insured and those that purchase
commercial insurance coverage – would be subject to rigorous DOL
oversight.
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To gain certification, a self-insured AHP would have to
demonstrate that its premiums are adequate to cover its claims and operating
expenses, that it has sufficient assets to ensure stability, and that it has
secured backup insurance to cover unexpectedly high losses. In addition, a
fund will be established under DOL oversight to continue to pay stop-loss
indemnity insurance premiums to cover outstanding claims in the event that
an AHP becomes insolvent and unable to maintain its coverage.
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AHPs that purchase insurance coverage do not present the
same level of financial risk as self-insured plans, but nevertheless will
also be subject to DOL certification to ensure that the organizations
offering the coverage are legitimate. We will work with the states and their
insurance commissioners to establish appropriate procedures through their
existing insurance regulatory programs to see to it that state-based
solvency requirements and necessary consumer protections for insured
products will benefit workers and their families with fully insured AHP
coverage.
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Safeguards Against Insolvency: An AHP that offers
self-insured coverage will be required to establish premium rates that are
adequate to cover claims and maintain adequate reserves, as determined by a
qualified actuary. Self-insured AHPs will also be required to keep
additional funds on hand to cover unexpected losses. AHPs will also have a
funding mechanism in place to ensure that claims can be paid if an AHP
becomes insolvent. These provisions generally parallel the requirements that
states impose on health insurers, and are of the utmost importance to ensure
that AHPs will deliver on their promises. Our goal is to require effective
and strong solvency protections.
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Safeguards Against Cherry-Picking: The Bush
Administration is committed to legislation that broadly spreads risk and
makes insurance affordable for all small employers regardless of health
status. Spreading risk and costs across a large group of individuals is
fundamental to effective health insurance. In the past, small group markets
have sometimes been vulnerable to practices such as “cherry-picking” by
insurers that segregate good risks from bad. Such practices can make
insurance unaffordable or unavailable for small firms when employees or
their families become seriously ill.
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The current AHP legislation is designed to ensure that
AHPs pool risk broadly, and thereby make insurance affordable for all
participating small companies – including those whose employees or
employees’ families suffer from ill health. Provisions directed at this
purpose include:
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Only bona fide associations, which are
in existence for at least three years for purposes other than providing
health insurance, can operate an AHP. This protection ensures that AHPs
cannot be formed solely for the purpose of marketing health insurance, a
practice historically associated with abuse. It also serves to provide a
built-in incentive for AHPs to offer quality coverage; just as employers
want to offer meaningful health benefits to attract and retain
employees, bona fide associations will want to offer their members
quality health coverage that will attract and retain association
members.
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A self-insured AHP must represent a
broad cross-section of businesses, allowing risk to be spread among
diverse groups.
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AHPs and participating employers may
not selectively direct higher-risk employees to the individual insurance
market.
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AHPs must offer all available options
to all employers and individuals in the association.
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The Health Insurance Portability and
Accountability Act (HIPAA) will apply to AHPs. Under HIPAA, group health
plans are subject to portability, pre-existing condition,
nondiscrimination, special enrollment, and renewability provisions.
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The newest version of AHP legislation,
H.R. 660, has been strengthened to ensure that AHPs could not charge a
participating company or employee more than another on the basis of the
health status of the companies’ employees or their families, except as
allowed under current state law.
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These provisions constitute strong protections against cherry-picking, and
we look forward to working with Congress to further ensure that AHPs cannot
cherry-pick healthier groups and individuals.
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ERISA, HIPAA and Other Laws: Like other group health plans, AHPs will
be subject to the fiduciary requirements of ERISA, which sets high standards
of behavior for health plan sponsors. In particular, the Health Insurance
Portability and Accountability Act (HIPAA) would apply to AHPs. Under HIPAA,
group health plans are subject to portability, pre-existing condition,
nondiscrimination, special enrollment, and renewability provisions. These
provisions also will limit the opportunity for cherry-picking. Other federal
health insurance requirements that provide consumer protections such as
COBRA, DOL’s claims regulation, the Mental Health Parity Act (MHPA), and
the Newborns' and Mothers' Health Protection Act (the Newborns’ Act) would
apply to AHPs.
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I am proud of the Department’s efforts to ensure that
American workers and their families benefit from the important federal
protections passed by Congress in the late 1990s. EBSA announced on February
26, 2003, a new compliance assistance program to help group health plans
successfully implement HIPAA, MHPA, WHCRA and the Newborns' Act. The new
compliance assistance program was announced jointly with the results of a
statistically valid audit of health plan compliance with these laws. These
efforts are the most recent example of the Department’s ongoing commitment
to effective regulation, implementation and enforcement of federal health
laws that benefit millions of Americans in both fully insured and
self-insured health plans.
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Thank you for the opportunity to testify today. Small business employers and
employees are in critical need of new ways to increase health insurance
coverage, and Association Health Plans are a substantial solution to this
problem. The Bush Administration strongly supports AHPs, and stands ready to
work with members of Congress and this Committee to help pass and administer
legislation that expands access to affordable quality health insurance
coverage for working Americans and their families.
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