AHP/MEWA Study: Association Health Plan Legislation Would Increase Administrative Costs For Small Businesses

Performed by: William M. Mercer, Inc.

An analysis by the benefits consulting firm of William M. Mercer found that AHPs/MEWAs have unique administrative costs, such as royalties and membership dues, that make it more expensive for small firms to purchase coverage through these groups. Moreover, Mercer found that general administrative costs for AHPs/MEWAs are similar to insurance companies and that this legislation provides no opportunity for AHPs to reduce administrative costs for small firms.

Key findings:

• Associations often require additional administrative loads: According to a 1995 survey of associations, 80% of group health insurance programs sponsored by associations produce revenue for the association. Association revenue comes from marketing fees, administrative fees, and royalties and licensing fees. Association-specific fees can be substantial. According to one survey, association administrative fees averaged 3.8%, while royalties (i.e., licensing fees charged to insurers) averaged 2.2% of premiums for national plans.
• Association membership fees can add to the cost of coverage: Association membership fees are an additional cost that must be borne by small firms that purchase health coverage through an AHP. "As a result of the fees required to join an association, firms and individuals may face higher total costs in the association market than they would if they purchased coverage directly from a health insurance company without joining an association."
• AHPs and insurers have similar administrative costs: "Administrative costs borne in the small group market would generally apply to federally certified AHPs as well." Sales commissions, employer billing, and underwriting expenses tend to be higher for small employers as compared to those for large employers. However, offering small group health plans through AHPs does not eliminate these costs.
  
  
• AHPs would not reduce administrative costs: "Based on our review, this legislation would provide no material opportunity for AHPs to reduce health insurance administrative costs for small businesses." AHPs could assume responsibility for administrative activities. "However, it is unlikely that AHPs could perform these activities at lower cost than insurers. Negotiating prices with vendors that are below the insurers' costs would be equally unlikely."

Mercer concludes that, "… for small group health plans offered by AHPs, the potential administrative cost increases typically would exceed the potential administrative cost savings. We estimate that the additional costs for small firms who buy AHP coverage typically would range from 1.5% to 5% of premiums."