January 14, 2000

CBO: AHP/MEWA Legislation Would Increase Premiums for 20 Million People

An analysis by the Congressional Budget Office found that most small employers and workers would pay higher premiums if a preemption from state law for Association Health Plans (AHPs), as contained in H.R. 2990, is enacted. The report reveals that AHPs would save costs by skimming the healthy from the existing state-regulated small group market, making coverage more expensive for the sick. Specifically, the report found that:

• AHPs would not significantly reduce the number of uninsured: Contrary to proponents' claims that AHPs could cover up to 8.5 million uninsured, the CBO estimated that coverage would increase by only 330,000 individuals. However, CBO also notes that the overall number of individuals insured would be lower, "because some of those who gained coverage through AHPs and HealthMarts would have otherwise obtained coverage in the individual market."
• Four in five workers would be worse off under AHPs/HealthMarts: According to the report, 20 million employees and dependents of small employers would experience a rate increase under AHPs, while only 4.6 million would see a rate reduction. In addition, 10,000 of the sickest individuals would lose coverage if AHP provisions were enacted.
• AHPs would save money primarily by "cherry picking": The CBO estimated that nearly two-thirds of the cost savings for AHPs would result from attracting healthier members from the existing insurance pool, thereby increasing costs for those who remain in the non-AHP market. The report states that, "In the long run, one would expect the most successful AHPs to be sponsored by associations whose members had lower-than-average health care costs."
• AHPs would eliminate benefits to cut costs: Contrary to proponents' claims that AHPs could offer generous benefits (e.g., comparable to those offered by Fortune 500 firms) while lowering insurance costs, the CBO found that dropping state mandated benefits would be the second major method that AHPs would use to reduce costs (after cherry picking). The CBO estimated that one-third of costs savings in AHPs would come from eliminating benefits.
• AHPs would not reduce overhead costs: Contrary to claims that AHPs could reduce overhead by 30 percent, "…CBO assumed that cost savings arising from the group purchasing feature of AHPs and HealthMarts would be negligible." The CBO found "…no substantial evidence that joining a purchasing cooperative produced lower insurance costs for firms."
• States with aggressive insurance reforms would see the most damage: The report indicates that states with strict insurance reforms (such as Massachusetts, New Jersey, and New York) would be most attractive to AHPs. The report concludes that "in states with more tightly compressed premiums - where the most cross-subsidization occurs - low-cost firms would face the greatest potential difference in price between traditional and AHP/HealthMart plans.''

The full report, entitled "Increasing Small-Firm Health Insurance Coverage Through Association Health Plans and HealthMarts," is available at CBO's Web site (www.cbo.gov).