Republicans have embraced health association plans as a way to help self-employed people and small businesses maximize affordability of coverage by using their leverage as a large group to negotiate lower premiums.

The Republicans’ alternative health care plan amends the Employee Retirement Income Security Act of 1974 — the federal legislation that governs employer-sponsored self-insured health policies — to allow the federal government to certify and regulate the solvency and adequacy of association plans. Under their legislation, small businesses can come together, by industry or trade, and form health plan through which they can purchase coverage for their employees.

But while the plans goals are laudable, in reality, associations could avoid covering sicker businesses by excluding certain key conditions from coverage and designing policies that only attract healthier applicants. According to the Republican bill, the association would not be required to offer a minimum benefits package and could set “contribution rates based on claims experience of the plan,” crowding employers whose employees actually use their insurance, out of coverage.

The “whole bill is set up to build fly-by-night associations. I run it for a couple of years, I shut it down,” Georgetown professor Karen Pollitz explained in a conversation with the Wonk Room. “I cover these 100 people this year. Next year, I have a different 100 members.” Indeed, between 2001 and 2003, four long-standing self-insured association health care plans became insolvent, “leaving $48 million in medical claims unpaid and 66,000 people and small businesses without insurance.” Health experts argue that association health care plans are governed by “licensing requirements that are often less stringent than those imposed on traditional insurers” and are “at far greater risk of becoming insolvent when claims suddenly or unexpectedly exceed their ability to pay them.”

The Republican legislation establishes new solvency and reserve requirements but it outsources any enforcement of self-insured or national association plans to the federal Department of Labor, “which lacks the tools, resources, and culture to protect businesses against fraud.” One report concluded that the “history of scams involving associations demonstrates that when the federal government has had sole oversight authority, fraud flourished with unscrupulous individuals leaving businesses and their workers without health coverage and with millions of dollars in unpaid medical bills.”

The legislation requires association health care plans to contribute to an ‘Association Health Plan Fund’ that would pay out outstanding claims in cases of insolvency, but leaves the federal government on the hook if the money in the fund runs out. “[I]f the Secretary determines that there is a reasonable expectation that” claims would “would not be satisfied by reason of termination of such coverage. The Secretary shall, to the extent provided in advance in appropriation Acts, pay such amounts so determined to the insurer designated by the Secretary,” the bill states on page 73.

Republicans have long argued that allowing insurers to sell policies across state lines would provide Americans with greater choice of coverage. Under the Republican health care alternative filed yesterday in the House, young and healthy individuals can purchase policies from insurers that don’t abide by local benefit or rate standards. The Republican bill allows the health insurer to choose a “primary state” “whose covered laws shall govern the health insurance issuer” and market policies to other states without adhering “to all of the consumer protection laws or restrictions on rate changes of the state.” Insurance companies could choose a state with scarce regulations and sell policies that don’t provide adequate benefits and only attract the healthiest applicants.

Democratic leaders argue that the policy would allow health insurers to circumvent critical consumer regulations and further fragment risk pools. But a little-noticed provision on pages 202-206 of the House health care bill also allow insurers to sell policies across state lines. Section 309 says that states may form “Health Care Choice Compacts” to “facilitate the purchase of individual health insurance coverage across State lines.” But that’s where the similarities end.

While the Republican-backed proposal allows the insurance company to decide that it will be governed by the state with the scarcest regulations, the Manager’s Amendment to the House health care bill specifies that the states that form the compact can designate the “primary state,” not the insurer. The Democrats’ compacts would be subject to model guidelines developed by the Secretary of Health and Human Services (in consultation with the National Association of Insurance Commissioners) and would preserve the authority of all states to enforce local laws relating to market conduct, unfair trade practices, network adequacy, consumer protection standards, grievance and appeals, fair claims payment requirements, rate review, and fraud.

The insurer would be subject to the benefit mandate standards and rate regulations of a single primary state, but — unlike the Republican alternative — it would not be able to avoid local consumer protections and regulations. Still, some progressives fear that insurance companies will pressure compacts to chose the state with the lowest standards and that state governments would lack the resources to properly enforce local consumer protections.

The bill reported out of the Senate Finance Committee also permits states to form “health care choice compacts,” although the rules governing those compacts are still being developed by Senate staff working to produce a final Senate bill.