Obscure CMS “Look-Through Rule” is Frustrating Small Businesses by Blocking Access to Efficient Large Group Health Plan Market

U.S. small businesses are well-aware they do not operate on a level playing field with large businesses. Large businesses have better access to cash, capital, and banking relationships; large businesses have direct access to policy makers, politicians, and regulators; and large businesses can pay for expensive attorneys, accountants, and lobbyists, which small businesses can’t afford. For these reasons, large businesses may always be better positioned to weather a crisis such as COVID-19, which is currently decimating millions of small businesses across America. But one frustrating pain point for small businesses — an unfair insurance rule called the “look-through rule” — is really indefensible and can easily be fixed by the government. This Center for Medicare and Medicaid (CMS) insurance rule is harming small businesses across America by preventing access to the less expensive and healthier large group health plan market.

For decades, small businesses have sought to access the large group health insurance market by banding together through associations. Think of a collection of small restaurants in a single metro area, such as New York, wanting to band together through their local restaurant association to purchase a single large group health plan. The reasons to form an Association Health Plan (AHP) are obvious. A large group of businesses means greater bargaining power with insurers, administers, and provider networks. A single large group also has materially greater plan design flexibility. A large group of participants creates more spreading of risk and lessens the premium impact of adverse claims experience. As a large group, small businesses have a financial incentive (and not just a moral one) to implement innovative wellness and preventative health programs that can improve health outcomes of their employees and significantly drive down premiums. As a large group, the NY metro area restaurants in our example could take advantage of all the administrative efficiencies and scalable technologies that are currently inaccessible to small businesses.

However, our financially-strapped New York metro area restaurants — just like millions of other small businesses across the nation right now — have been blocked from accessing the large group health plan market by the so- called “look-through rule.” Under this insurance rule, small businesses generally retain their status as a small business even when coverage was purchased through a large trade or region-based association. According to a Center for Medicare and Medicaid (CMS) Bulletin issued on September 1, 2011, an insurance carrier underwriting an AHP must “look-through” the association sponsoring the large group health plan to the underlying size of each association business. If the AHP business employs 50 or fewer employees, the insurance carrier must apply the ACA’s small group market reforms to the AHP health coverage. In addition, if the AHP member is a sole proprietor, self-employed freelancer, or gig worker, the insurance carrier is required to impose the ACA’s individual market reforms to this individual’s coverage. In short, the look-through rule takes away all the incentives for small businesses to come together and form an AHP in the first place.

Critical relief to small businesses seeking to access the benefits of the large group market may be coming soon. Currently working its way through the federal court system is a new Department of Labor (DOL) regulation that expands the types of associations that are considered bona fide. While this DOL regulation does not revoke the look-through rule, it does greatly expand the universe of small businesses that may qualify for large group treatment when they band together through trade and regional associations. The AHP regulation accomplishes this, in part, by amending the definition of “employer” within the Employee Retirement Income Security Act (ERISA), the 1974 federal law that governs large group health plans, to include working owners. This broader definition of employer has strong backing from the Chambers of Commerce, the Small Business Association (SBA), and major small businesses and self-employed trade associations such as the National Restaurant Association, National Federal of Independent Businesses (NFIB), and the National Retail Association. If the federal courts currently reviewing the AHP rule get this one right, AHPs will bring important relief and cost savings to millions of U.S. small businesses at this critical time.