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Association Health Plans: A Godsend, or a Recipe for Disaster?

Capitol Hill has its hands full debating whether AHPs are the right solution to the health-care crisis for small-business owners. What's your take?

Opinions expressed by Entrepreneur contributors are their own.

Leaders in Congress have introduced a controversial bipartisan health-care bill that would empower small businesses to use group force to compete for low-cost medical coverage. The legislation banks on the viability of Association Health Plans (AHPs): medical coverage purchased through trade guilds on behalf of the small businesses that make up their membership.

AHPs have existed for decades, both nationally and on the local level. But the Small Business Health Fairness Act would exempt them from state insurance regulations, a key advantage long enjoyed by union and corporate health plans.

Advocates claim that this "strength in numbers" approach could finally narrow the gap in benefits between small and large companies. "Absolutely they will help," says Debra Faraone, president and owner of The Elements Inc., a small marketing firm in Virginia. "It is the only answer to lowering these outrageous costs and leveling the playing field."

The bill, however, has triggered aggressive debate over whether AHPs can actually wrestle down skyrocketing premiums and broaden the options available to employees. While small-business and trade organizations in the hundreds have endorsed the bill, the legislation has provoked opposition in the health-care field, including from medical associations and insurance companies. Such groups argue that in the absence of local regulations, AHPs will be free to gouge customers with high premiums; would select only low-risk candidates; and, in a worst-case scenario, might destabilize the entire health-care industry.

Susan Jacobs, president of New York-based Hamilton Green & Company Ltd., argues that the small-business clients of her insurance agency would never see the 15 to 30 percent savings on health-care costs that advocates of the bill have promised. "Almost all our clients that have been covered at some time through AHPs have had their rates increased and/or current coverage dropped or modified on very short notice," Jacobs says. "We have been in business since 1992, and our overall experience with AHPs has been extremely poor."

Even if businesses did see a dip in their premiums, Jacobs asserts, the discount wouldn't be permanent. She notes that insurance companies have long struggled with the question of how to price their AHPs fairly, grappling with fluctuating enrollment and other unpredictable factors that often lead them to drop the plans entirely. "When there is a rate advantage, it is usually only a temporary one," Jacobs says. "We see very little pricing advantage and feel most small businesses are better off having direct contact with the insurance company."

AHP Resources on the Web
  • a Web site promoting AHP legislation, offering updates, background information, and a list of trade guilds and organizations backing the bill
  • the online home of the U.S. Department of Labor
  • the official Web site for the U.S. House of Representatives
  • the online home of Insure Our Future, an AHP opposition group
  • Web site for the Mental Health Liaison Group, which opposes AHPs

Seeking Permanent Solutions

But entrepreneurs like Ronald Hatch say they are living testaments to the need for AHP coverage. Hatch, a fourth-generation furniture shop owner, hadn't worried about health insurance costs in the nearly 30 years since he became president of his family business. But in 2001, his insurance company pulled its coverage in South Dakota, where he owned one of his two shops, and that, in turn, forced him to adopt a new insurer for both of his stores.

After studying bids and finding no real price competition, he picked a plan--only to see the premiums skyrocket 50 percent, leaving more than two-thirds of his employees without affordable coverage. Hatch responded by paying half of each employee's yearly deductible, along with much of the monthly insurance costs, but he hardly regards that as a permanent solution.

In the meantime, Hatch testified before the House Committee on Small Business last year, promoting AHPs as an escape hatch for businesses caught in the same crush. "I really think they are a viable option," Hatch says. "Right now, we're faced with the situation with just 20-something employees, and if we have one or two with any serious health problems, it drives our underwriting through the roof."

Faraone likewise says that hunting for affordable health insurance has left her company both financially strapped and swamped with paperwork. "We spend an enormous amount of time shopping for plans that the company and employees can afford," she says. "With our current health-care costs rising substantially every year, it makes it much more difficult to become financially successful and to compete when hiring employees beyond our means."

Grim Predictions

But not all entrepreneurs are so enthusiastic about the legislation's potential. Todd McCracken, president of National Small Business United (NSBU), which opposes the legislation, cautions that without local regulation, AHPs may resort to aggressive risk-aversion tactics to turn a profit--and might even orchestrate their coverage plans so that they appeal only to select, healthy individuals.

"By carefully designing benefit packages that will be relatively unattractive to older and less healthy populations, AHPs will be able to simultaneously attract a higher proportion of younger and healthier individuals," McCracken warns. AHPs that don't cherry-pick clients, meanwhile, will instead boost their premiums to survive, leading to "the destruction of the traditional insurance market for small firms, and the displacement of millions of currently insured individuals," he says.

Many small-business owners, however, remain optimistic despite such predictions.

"Fraudulent activity can exist in any plan with greedy individuals, as we have seen with the bankruptcy of many large corporations," Faraone says. "But the strengths of this plan outweigh the negatives. These arguments are coming from the companies that will no longer be able to take advantage of small businesses."

How to Protect Your Employees When Purchasing Health Insurance
  1. Compare insurance coverage and costs. Always compare the benefits and costs of multiple insurance products. If one product appears to offer similar benefits at a dramatically lower cost, ask questions.
  2. Do background checks. Confirm that the person offering the product is a licensed insurance agent with a proven record of reliability. Promoters of insurance scams often engage unlicensed insurance agents to market their product as a cheaper alternative to traditional insurance. Check out unknown agents with your state insurance department. And verify that any unfamiliar company, organization or product is approved by your state insurance department.
  3. Scrutinize the policy. Examine the policy to determine the actual coverage and whether the promised benefits are fully insured by a licensed insurance company. Do not confuse representations about stop-loss coverage with a guarantee of group health benefits. Stop-loss coverage often protects only the issuer, not the insured individuals.
  4. Request references of employers enrolled with the provider. Get information from employers about benefit payment history and claim turnaround time.
  5. Ask about the allocation of premiums. Allocation of a high percentage of the premiums to commissions, fees and administrative expenses may indicate a problem with the product or the insurer.
  6. Report problems. Contact your regional office of the U.S. Department of Labor's Employee Benefits Security Administration via or by calling (866) 275-7922 if you have a problem to report.

Jennifer Anne Perez, a former Los Angeles Times reporter and editor for numerous business trade journals, is currently a freelance business writer based in New York City.

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