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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 bipartisanhealth-care bill that would empower small businesses to use groupforce to compete for low-cost medical coverage. The legislationbanks on the viability of Association Health Plans (AHPs): medicalcoverage purchased through trade guilds on behalf of the smallbusinesses that make up their membership.

AHPs have existed for decades, both nationally and on the locallevel. But the Small Business Health Fairness Act would exempt themfrom state insurance regulations, a key advantage long enjoyed byunion and corporate health plans.

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

The bill, however, has triggered aggressive debate over whetherAHPs can actually wrestle down skyrocketing premiums and broadenthe options available to employees. While small-business and tradeorganizations in the hundreds have endorsed the bill, thelegislation has provoked opposition in the health-care field,including from medical associations and insurance companies. Suchgroups argue that in the absence of local regulations, AHPs will befree to gouge customers with high premiums; would select onlylow-risk candidates; and, in a worst-case scenario, mightdestabilize the entire health-care industry.

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

Even if businesses did see a dip in their premiums, Jacobsasserts, the discount wouldn't be permanent. She notes thatinsurance companies have long struggled with the question of how toprice their AHPs fairly, grappling with fluctuating enrollment andother unpredictable factors that often lead them to drop the plansentirely. "When there is a rate advantage, it is usually onlya temporary one," Jacobs says. "We see very littlepricing advantage and feel most small businesses are better offhaving direct contact with the insurance company."

AHP Resources on the Web
  • a Web site promoting AHPlegislation, offering updates, background information, and a listof 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 InsureOur Future, an AHP opposition group
  • Web site for the Mental HealthLiaison Group, which opposes AHPs

Seeking Permanent Solutions

But entrepreneurs like Ronald Hatch say they are livingtestaments to the need for AHP coverage. Hatch, a fourth-generationfurniture shop owner, hadn't worried about health insurancecosts in the nearly 30 years since he became president of hisfamily business. But in 2001, his insurance company pulled itscoverage in South Dakota, where he owned one of his two shops, andthat, in turn, forced him to adopt a new insurer for both of hisstores.

After studying bids and finding no real price competition, hepicked a plan--only to see the premiums skyrocket 50 percent,leaving more than two-thirds of his employees without affordablecoverage. Hatch responded by paying half of each employee'syearly 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 onSmall Business last year, promoting AHPs as an escape hatch forbusinesses caught in the same crush. "I really think they area viable option," Hatch says. "Right now, we're facedwith the situation with just 20-something employees, and if we haveone or two with any serious health problems, it drives ourunderwriting through the roof."

Faraone likewise says that hunting for affordable healthinsurance has left her company both financially strapped andswamped with paperwork. "We spend an enormous amount of timeshopping for plans that the company and employees can afford,"she says. "With our current health-care costs risingsubstantially every year, it makes it much more difficult to becomefinancially successful and to compete when hiring employees beyondour means."

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

"By carefully designing benefit packages that will berelatively unattractive to older and less healthy populations, AHPswill be able to simultaneously attract a higher proportion ofyounger and healthier individuals," McCracken warns. AHPs thatdon't cherry-pick clients, meanwhile, will instead boost theirpremiums to survive, leading to "the destruction of thetraditional insurance market for small firms, and the displacementof millions of currently insured individuals," he says.

Many small-business owners, however, remain optimistic despitesuch predictions.

"Fraudulent activity can exist in any plan with greedyindividuals, as we have seen with the bankruptcy of many largecorporations," Faraone says. "But the strengths of thisplan outweigh the negatives. These arguments are coming from thecompanies that will no longer be able to take advantage of smallbusinesses."

How to Protect Your Employees When Purchasing HealthInsurance
  1. Compare insurance coverage and costs. Always compare thebenefits and costs of multiple insurance products. If one productappears to offer similar benefits at a dramatically lower cost, askquestions.
  2. Do background checks. Confirm that the person offeringthe product is a licensed insurance agent with a proven record ofreliability. Promoters of insurance scams often engage unlicensedinsurance agents to market their product as a cheaper alternativeto traditional insurance. Check out unknown agents with your stateinsurance department. And verify that any unfamiliar company,organization or product is approved by your state insurancedepartment.
  3. Scrutinize the policy. Examine the policy to determinethe actual coverage and whether the promised benefits are fullyinsured by a licensed insurance company. Do not confuserepresentations about stop-loss coverage with a guarantee of grouphealth benefits. Stop-loss coverage often protects only the issuer,not the insured individuals.
  4. Request references of employers enrolled with theprovider. Get information from employers about benefit paymenthistory and claim turnaround time.
  5. Ask about the allocation of premiums. Allocation of ahigh percentage of the premiums to commissions, fees andadministrative expenses may indicate a problem with the product orthe insurer.
  6. Report problems. Contact your regional office of theU.S. Department of Labor's Employee Benefits SecurityAdministration via or by calling (866) 275-7922if you have a problem to report.

Jennifer Anne Perez, a former Los Angeles Timesreporter and editor for numerous business trade journals, iscurrently a freelance business writer based in New YorkCity.

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