A report on association member health plans.

Survey reveals tumultuous, challenging period.

The past five years have been a tumultuous and challenging period for association member health plans, as is reflected in the results of the ASAE-W. F. Morneau & Associates Survey of Association Member Health Plans. The good news is that the association market remains a critical source of health insurance, generating at least $6 billion of annual health premiums and providing coverage for at least 4 million employees and their dependents. A number of the biggest and best association health plans in the country are bigger and better than ever (the average premium reported was $11.6 million, up from $7.3 million in 1992). In fact, the 20 largest association health plans now represent 60 percent of the total association market, up from 30 percent in 1992. The plans that are thriving despite the intense level of competition have kept a tight lid on expenses; introduced a wide range of managed care products; negotiated aggressively with insurance carriers; developed active marketing strategies; and, with excellent customer service, attracted and retained members.

The past five years have also been characterized by a significant shakeout in the association health market. Hundreds of association plans, especially smaller plans and those national in scope, went out of business or were terminated by insurance carriers. Our estimates indicate that the total premiums being generated by association health care plans have declined by as much as 50 percent, reflecting not only the exit of many plans but also the attrition in participation being experienced by the remaining plans: Participation level in more than 57 percent of the plans surveyed declined during the most recent three-year period.

The average rate increases being put into place at association health plans are also a growing concern. As of the most recent renewal, associations reported an average rate increase of 8 percent, compared to just more than 3 percent when surveyed in 1994. Accelerating rates do not bode well for the future stability of association health plans, especially those that may be on the edge of viability.

Based on the statistics developed through the survey, as well as in-person interviews conducted across the country with association executives managing member health plans, we offer the following observations:

1. Most national association health plans have exited the health care market. The following factors are driving this trend:

* It is increasingly difficult and expensive to comply with state-specific health care legislation.

* To compete, national associations must offer a range of health care options that members can access locally. It is difficult to locate an insurer capable of providing this range of options nationwide.

* Health care products are increasingly complex and are a major expenditure for many individuals and firms. As such, they often need to be distributed locally, in person. It may be prohibitively expensive or logistically impractical for a national association to establish an appropriate level of in-person presence.

* Many national carriers, recognizing these challenges, have exited the national association market, terminating numerous association plans in the process.

2. The passage of the Health Insurance Portability and Accountability Act, which contains provisions limiting an association's ability, to deny coverage to individuals and groups based on medical conditions, has had a significant impact on association health plans:

* Several carriers have eliminated or limited coverage to associations serving professionals such as certified public accountants and dentists, citing the onerous provisions of the law. A number of association health plans are currently in the midst of attempting to obtain alternative coverage, with limited success.

* A number of major carriers implemented completely new rating methodologies as a reaction to the requirement of the Health Insurance Portability and Accountability Act to accept all applicants regardless of health conditions. These new methodologies are characterized by a much wider range of rates based on an applicant's demographic characteristics and by the placement of members in numerous rating tiers depending on the classification. Association health plans accustomed to consistent rates for all participants have experienced significant turmoil attempting to implement these complex structures.

3. In general, insurance carriers are less interested in association plans than they were five years ago. It is not uncommon to find few or no bidders when an existing plan attempts to change carriers.

4. Because of the consolidation taking place among health insurers, association health plans have found themselves negotiating with larger and larger entities. As a result, it is increasingly difficult for even the largest plans to exercise significant clout with these often huge carriers. This fact, combined with the lack of many alternative carriers, has led to scenarios in which association health plans are subject to unilateral decisions by carriers. Common examples of actions recently forced upon association health plans include the following:

* Numerous associations, including several very large plans, have had to convert their health plans to community rating, a methodology that sets rates independent of an association's claims experience and generally allows little opportunity for the association to negotiate with the carrier regarding rates, plan design, expenses, and so forth. In the typical scenario, the insurance carrier has mandated community rating for all association plans, even though this is not required by state legislation.

* As mentioned previously, many associations have had to implement completely new rate structures. While the need for such changes has been attributed by the carriers to the Health Insurance Portability and Accountability Act, nothing in this legislation specifically references rates or how they must be developed.

* It is now typical for carriers to prohibit the offering of any other company's health care product concurrent with their own. For example, an association might want to offer a menu of choices for members, perhaps providing a health maintenance organization option with a carrier other than the primary insurer. A number of major carriers have told their association clients that if they offer any other program, their plans will be terminated.

5. The level of plan success is quite driven by the state in which an association health plan is predominantly located. The largest markets for association health plans are Pennsylvania and Michigan. Characteristics of these and other important association states include:

* the presence of a carrier with a dominant market share and which views association plans favorably;

* state-specific health care legislation that does not excessively limit the viability of association health plans, such as the small-group reform enacted in New York; and

* a population of an appropriate magnitude to support associations with sufficient membership to develop viable health plans.

6. Self-insurance is an important funding mechanism, with about 25 percent of associations reporting some form of self-insurance. Many associations with some form of self-insurance have reported being audited by the Department of Labor. It appears that a particular focus has been placed on these plans, and unfortunately, these audits can be time consuming and expensive, even if no violations are ultimately uncovered.

In most states, self-insured plans inhabit a legal limbo - no legislation regulates them, but they are generally looked upon unfavorably.

7. Managed care was a relatively new phenomenon for association health plans in 1992, with many plans still composed primarily of traditional indemnity products. A massive shift has occurred during the past five years, with the vast majority of associations at least offering managed care as part of the product portfolio. The largest association health care plans in the country would now typically have the majority of their participants in some form of managed care (e.g., preferred provider organization, point-of-service, or health maintenance organization).

8. Despite the considerable economic pressures being placed on association health plans to remain competitive, it is still quite common for associations to invest minimal resources ensuring that their plans are being managed appropriately. According to the survey results, few association executives know what the association is paying to vendors (i.e., insurers, administrators, etc.) with respect to expenses, fees, and commissions. It is often stated that these costs are "part of the premium," suggesting that somehow they, are exempt from scrutiny. Most associations rarely conduct basic due diligence regarding vendors, such as regularly putting their services out to bid. It is not surprising that the survey results demonstrate that associations are often substantially overpaying for marketing, servicing, and administrative services.

9. Associations have recognized the need to develop scale and clout in order to remain viable and continue to provide a valued service to members. A logical conclusion has been to attempt to merge with other association health plans, ideally one located in a similar geographic area and serving not too disparate members. While there are a couple of examples of successful mergers (usually more of a takeover of a weak plan by a strong one), the vast majority of these merger attempts have failed or at least stalled. The primary barriers have been as follows:

* Association health plans are typically managed by an insurance committee or a board of trustees. A plan merger typically involves ceding power and control to a combined entity, a concession that has been unacceptable to most associations.

* The issue of how much revenue is to be earned by each association is usually a major barrier. Although plan expenses should be lower as a percentage of premium given a much larger merged plan, associations are often unwilling to accept such a reduction.

* The myriad logistical issues (i.e., rationalizing rates, plan design, agreeing on a common carrier) are complex though resolvable. The political and monetary issues tend to be the "deal killers."

10. Earlier in this decade the strong trend seemed to be internalization, as association health plans took more of the management functions (i.e., marketing, servicing, administration) in-house. Internalization was driven by the desire to take control of programs, often from long-standing brokers and third-party administrators. It was also often possible to reduce expenses through internalization, especially when the external vendors had been charging exorbitant fees and commission rates. The latest survey results, however, show little change in the percentage of tasks being performed internally. In fact, it appears from the data that the largest association health plans - those with more than $20 million of premium - may be going in the other direction, taking the lead from corporate entities, which are increasingly outsourcing functions (especially in the human resource and employee benefits arena) not critical to a firm's core mission and more cost-effectively performed externally. Properly structured, outsourcing can provide the best of both worlds for association health plans: control and ownership of the program and achievement of savings through lower operating costs and reduced overhead. We expect the outsourcing trend to continue as associations look to improve the efficiency and effectiveness of their organizations.

About the Survey

A survey jointly sponsored by ASAE and W. F. Morneau & Associates, an Alexandria, Virginia-based employee benefit consulting firm endorsed by the ASAE Services Corporation, was distributed to 7,169 associations during the spring of 1997; 974 surveys were returned for a response rate of 13.6 percent. This is the third edition of the Survey of Association Member Health Plans, the previous two having been conducted in 1992 and 1994. A major goal of the survey is to provide the association community with information that is useful in discussions of federal and state laws that may significantly affect these plans. The survey is also intended to generate information that may aid in the management of association health plans nationwide by identifying best practices regarding such issues as financing, funding, marketing, and other key success factors.

The 1997 survey process was supplemented by almost 100 in-person meetings conducted with association executives sponsoring member health plans. The purpose of these interviews was to go beyond the raw statistics of the survey and identify the key issues facing associations in different regions of the country. The results of these interviews are incorporated into trends discussed in this report.

Jerry Connelly is executive vice president of W. F. Morneau & Associates, Alexandria, Virginia. His e-mail address is [e-mail].