What is hospital financial transparency?
Hospital financial transparency describes when hospitals/health systems disclose data so the public and state regulators can understand its assets – including income from a variety of sources, such as payment for services rendered, grants, capital, and other investments – as well as its expenses and liabilities. To date, most state hospital transparency requirements have been designed to provide information about medical service pricing to consumers rather than a hospital/health system’s assets, which could better inform state health system cost-containment policies. To address and stem rising health care costs, states need specific information from hospitals and providers.
Why should states require hospital/health system financial reporting?
Year after year, hospitals account for the largest expenditure of US health care dollars, followed by physician and clinical services, of which over half are owned by a hospital or a hospital-affiliated health system. While hospitals/health systems are critically important to their communities, access to quality hospital care must be balanced with affordability. A growing number of state leaders are seeking to implement various cost-containment strategies, from payment reforms to total cost-of-care caps that aim to reduce the rapidly rising health care cost trajectory affecting everyone – employers, including states, and consumers. Understanding the relative financial position of a state’s hospitals can help policymakers analyze the vitality of the health care system and better target cost containment efforts.
How to determine if a hospital/health system is financially sound or in trouble?
By evaluating the financial health of hospitals/health systems in their states, policymakers will be better positioned to answer questions about hospitals’ ability to continue to meet debt obligations, pay their employees and vendors, and continue to provide quality care to patients. Unfortunately, developing this analysis isn’t always simple or straight forward. To gain insight into how hospitals are doing financially, policymakers need access to financial information provided in a standardized manner that is consistent across hospitals and over time. This allows for benchmarking across systems and hospitals at similar points in time and following changes in financial health over time. The National Academy for State Health Policy’s (NASHP) model law, An Act to Ensure Financial Transparency in Hospitals and Health Care Systems, and its accompanying financial reporting template can be used to collect the comprehensive data needed to help meet that challenge. Over time, financial information can be used to monitor the vitality of hospitals/health systems and evaluate the impact that policy changes or economic shifts have on them. And, it can help with planning the future of the health care system across a state.
What does the model act and accompanying reporting template do?
In most states, legislative authority would be necessary to require the collection of meaningful, comprehensive data from hospitals/health systems to evaluate their overall financial health. The model act specifies what data that should be collected, notes which hospital documents should be used to obtain the reporting information, and underscores that a state agency or office must be responsible for analyzing the data. Although not specifically written into the model act, NASHP has developed a reporting template that will help states implement the law because it is designed to collect the information needed to perform a financial health evaluation.
As a result of increased consolidation, most hospitals/health systems are now a part of bigger systems, therefore, to fully understand a hospital’s finances, data must be collected from parent system. Individual hospitals, or a consolidated health system, or component entities within a health system such as affiliated physician practices or a health plan are ordinarily included in the financial statements of the “reporting entity.” Collecting data at the system level does two things. First, it assigns responsibility to the entity that has the greatest capacity for completing and submitting the template without undue burden. Second, the reporting entity or system is responsible for all of the individual hospitals and affiliated providers that are part and parcel of the system as a whole. It is that entity that has the ability to transfer funds between affiliates to ensure viability. If the system is healthy, individual affiliates should also be healthy.
Alternatively, policymakers may wish to have access to the most granular data possible, which would require collecting data at the individual hospital level as well as at the level of the system. The data collection template can be modified easily to use at the individual hospital level. Similarly, the language included in the model act can be modified to reference the requirement that data be collected at the individual hospital level, the system level or at both levels.
The reporting template also requests data that will help policymakers measure and compare financial performance on key measures of financial health, such as:
- Liquidity – the ability to meet short term obligations, including payroll;
- Profitability – the ability to cover operating expenses and generate enough profit to cover capital and debt service needs;
- Solvency – the ability to repay long term debt; and
- Capital adequacy – the ability to invest in a competitive level of capital assets, such as digital imaging capability (X-ray, magnetic resonance imaging (MRI), or mammography equipment).
Why can’t hospitals simply provide audited financial statements?
Unfortunately, not all of the data related to a health care system or an individual hospital’s finances are readily available to the public through an audited financial statement. It can be a challenge to access current audited financial statements, even for nonprofit hospitals/hospital systems when they are available, and the structure of those statements can be difficult analyze. Also, individual audited statements may not be comparable across all hospitals/health systems, reducing their utility to state policymakers who are charged with protecting/ensuring access to quality, affordable care throughout the state. Even with expected variations in profitability for hospitals/health systems across a state, there is value in tracking financial health of these facilities using standardized metrics that utilize the same format for all hospitals/health systems in the state. For example, if a state implements a cost-containment strategy that adversely affects a particular hospital, the data will help identify the impact and policymakers can change the strategy.
The reporting templates must be completed by the providers themselves, who must also provide an attestation that the data submitted to the state is true and accurate. Hospitals may claim that sharing financial statements is burdensome, intrusive, or threatens its competitive positioning. But hospitals prepare financial statements as a matter of course, so reporting of its data – even when required on a standardized template – should not be so burdensome as to override the public interest in monitoring the financial health of these extraordinarily important resources.
Which state agency/office should be the identified lead for receiving and analyzing the data?
Data submissions will need to be directed to a responsible public agency. In states that have an all-payer-claims database, the agency housing that function would be a good candidate, as it is likely to already have the resources required to analyze and report on the data. States with health authorities that oversee system spending can opt to “house” the financial data repository as they are likely already collecting similar information. An alternative is the unit within the state’s Medicaid agency that is responsible for auditing hospitals’ Medicare Cost Reports, which will have resident expertise to assess financial data. State health planning offices are also worth considering, as the information collected via financial reporting will inform their work. The resources required would not be expected to require an additional appropriation or addition of staff.
Some states may lack the expertise to work with the data collected. In those cases, the state may wish to consider partnering with its public university system which will likely have the ability to support policymakers in their analysis of the financial data collected.
The model act includes a requirement that the state agency collecting the data report out to the Legislature each year on the financial status of the state’s hospitals. The proposed language directs data to be reported out on an aggregate rather than on an individual hospital basis. That language is purposeful as the release of specific data can open the door to litigation by hospitals charging the legislation could lead to collusion. By collecting data at a granular level, however, decisionmakers will have access to data to support the development of sound policies, while releasing the data only in an aggregated form protects the integrity of the transparency initiative.
What can state officials immediately learn from data submitted by hospitals/health systems?
The financial template is designed to automatically calculate a number of standard key financial ratios that are important for a high-level understanding of a system’s financial condition, including profitability, liquidity, and solvency. These data points will help answer the following questions:
- What is the hospital/health system’s snapshot of all financial activities for a given period of time?
- What has the hospital/health system earned and lost in providing patient care services during that period?
- Can the hospital/health system pay its current financial obligations with its existing liquid assets, such as on-hand cash versus funds it has in investments?
- What is the hospital/health system’s “days of cash on-hand,” which indicates how many days the entity can continue to pay its operating expenses using its liquid assets like cash?
- How many days can a hospital/health system continue to pay its operating expenses given cash on-hand and other liquid resources, taking into account its board of directors-designated and undesignated investments?
- What is the average number of days patient accounts are in a collection period? The longer it takes to get patient care payments “in the door,” the less cash is available to meet operation costs.
- What are total net assets compared to total assets, which reflects the ability to take on more debt? A lower value indicates that the reporting hospital/health system has a substantial amount of financed debt that it has used to underwrite the acquisition of assets and is highly leveraged.
- Is the hospital/health system able to cover its debt with the yearly cash flow from its operations? The higher this ratio, the better able the entity is to handle its debt load.
- How old are the physical buildings and assets of hospital/health system? Generally, the older the average age, there will be a greater need in the short-term for the hospital/health system to invest in capital resources, including X-ray, MRI, etc.
- What is the portion of total patient service revenues that were charged out as charity care?
- What is the proportion of the hospital/health system’s bad debt or the patient service charges that are not expected to be collected?
Are there resources available to understand and assess hospital financing?
This model law and accompanying resources includes a helpful publication – A Community Leader’s Guide to Hospital Finance– that provides a high-level overview of important aspects of hospital finance. This guide was recently updated and is useful to policymakers who want to understand the health system landscapes in their states so they are better positioned to understand the viability of their states’ health care infrastructures. It will also help them assess options to address the rising costs of care and to responsibly appropriate scarce state resources.
As states respond to the need for increased hospital bed capacity due to COVID-19, governors and legislatures in 22 states have waived certificate-of-need (CON) requirements – streamlining the process for hospitals to add bed capacity. These waivers have focused attention on decades-old CON laws and their utility in a changing health care landscape. The National Academy for State Health Policy’s (NASHP) 50-state scan of CON laws shows which facilities are subject to CON, the range of activities that trigger a CON review, and the information considered during review.
At least 11 states have acted to limit the dispensing of chloroquine and hydroxychloroquine – prescription drugs that have been cited as providing protection against coronavirus (COVID-19) without adequate clinical evidence to support that claim. To protect consumers with or at risk of COVID-19 and to prevent stockpiling of these drugs, which treat malaria, rheumatoid arthritis, and lupus, at least 10 state pharmacy boards have issued rules and recommendations that limit the use of these drugs while assuring those with non-COVID-19-related illnesses can continue to receive their medicines.
These state actions were taken before the US Food and Drug Administration’s (FDA) emergency authorization allowing the limited use of chloroquine and hydroxychloroquine. FDA stipulated that the drugs “may only be used to treat adult and adolescent patients who weigh 50 kg or more and are hospitalized with COVID-19, for whom a clinical trial is not available, or participation is not feasible.” The FDA had earlier authorized drug manufacturers to donate these drugs to the Strategic National Stockpile for distribution to hospital for these targeted populations.
FDA’s authorization is limited and may be accommodated by state regulatory guidance. Other states are expected to – and may have already implemented – similar limits on dispensing or other guidance regulating the use of these drugs in the fast-moving world of protecting consumers and the supply of drugs during the COVID-19 pandemic
To date, seven states prohibit pharmacists from dispensing these drugs unless the prescription bears a written diagnosis consistent with evidence of its use.
- New York explicitly requires prescribing of these drugs for a Food and Drug Administration-approved indication or as part of an approved trial. North Carolina, New York, and Ohio also require a confirmed positive COVID-19 test result prior to dispensing the drugs for that experimental purpose.
- Most states limit supply to 14 days and limit or prohibit refills.
- New York and Ohio explicitly prohibit use of the drugs for experimental or prophylactic purposes.
- Texas and North Carolina include additional drugs in their new rules, all of which have been cited either by social media or by limited studies to hold promise for the treatment of COVID-19.
- Pharmacy boards in Louisiana, Kansas, and Missouri have issued recommendations that encourage pharmacists and prescribers to use due diligence and professional judgement when prescribing these drugs and to limit the quantities prescribed.
At least one state insurance department has issued guidance detailing the prescribing of chloroquine and hydroxychloroquine. Last week, the Massachusetts’ Insurance Commissioner released a bulletin to all health insurers with the stated expectation that carriers directly, or through their pharmacy benefit managers, establish prior authorization systems to prevent the hoarding of these drugs and avoid inappropriate prescribing.
The National Academy for State Health Policy will continue to track and provide updates about state actions.
Every state in the nation has proposed bills to limit pharmaceutical drug prices and the pace of that legislative work increases each year. The usual responses from pharmaceutical manufacturers and their allies is to threaten to reduce their investments in new drug research and development and challenge the new state laws in federal court. In their appeals, they often argue that the new state laws limit the industry’s free speech, breach patent protections, reveal trade secrets, and extend beyond state boundaries, which they claim violates the federal Dormant Commerce Clause.
As state legislators prepare for their 2020 sessions amid growing interest in addressing prescription drug prices, the National Academy for State Health Policy (NASHP) commissioned the University of California’s Hastings School of Law to develop a legal brief to help state lawmakers avoid some of the industry’s legal landmines.
The legal brief, Navigating Legal Challenges to State Efforts to Control Drug Prices: Pharmacy Benefit Manager Regulation, Anti-Price-Gouging Laws, and Price Transparency, focuses particularly on bills most commonly introduced in states – pharmacy benefit management (PBM) oversight and pricing transparency – and provides insights into anti-price-gouging proposals.
The authors, who are health policy experts and attorneys, note that laws that require PBMs to be licensed or registered with states or require pharmacy audits have historically avoided legal challenges. But today, legal challenges are increasing as states seek more accountability and propose or enact laws to prohibit spread pricing, regulate use of certain pricing lists, or require fiduciary responsibility. And, as always with state reform efforts, the Employee Retirement Income Security Act (ERISA) rears its head if laws “relate to” self-funded plans regulated by federal law. In the brief, authors Katie Gudiksen, Sammy Chang, and Jaime King suggest strategies states can consider to strengthen legislative language against legal challenge.
To date, pharmaceutical groups have challenged transparency laws in two states – Nevada and California.
- Nevada reached a settlement by limiting and defining what information could be publically disclosed and what would be held confidential.
- While California moves to implement its law, state officials are awaiting judgment on a lawsuit filed by the industry pending in US District Court in the Eastern District of California.
Industry challenges to transparency laws include alleged violations to trade secret, interstate commerce, and free speech laws. Meanwhile, states are working to thread the needle between consumers’ right to know and protecting industry information.
This new NASHP legal brief is designed to help policymakers navigate the complexity of these laws and help inform their legislative drafting. NASHP’s Center for State Rx Drug Pricing continues to support states as policymakers develop and implement policies to lower drug costs.
NASHP looks forward to its continuing collaboration with colleagues at the University of California’s Hastings College of Law as we advance this important work.
NASHP’s Center for State Rx Drug Pricing, with support from Arnold Ventures, commissioned the analysis from experts affiliated with The Source on Healthcare Price & Competition at the University of California’s Hastings College of Law.
The profound connection between the environment and human health makes headlines primarily when things go wrong: when air pollution triggers asthma attacks, water is tainted by toxins, and tick- and mosquito-borne diseases spread, propelled by a changing climate. But some state leaders see the health of the environment as a critical and continuous state policy priority.
A recent analysis by the National Academy for State Health Policy (NASHP) showed that at least half of the nation’s governors called for environmental protection measures in their 2019 inaugural or state of the state addresses. In addition, 23 state governors signaled their commitment to addressing climate change by joining the US Climate Alliance. Clean water, climate change, and clean and renewable energy goals topped the list of environmental priorities articulated by governors across the country. For example, the governors of Maine and Florida both addressed the environment in their speeches:
- Maine Gov. Janet Mills: “The Gulf of Maine is warming faster than almost any other saltwater body in the world, driving our lobsters up the coast. Our coastal waters are growing acidic, temperatures are fluctuating, and sea levels are rising, endangering our shellfish industry. Our forests are less suitable for spruce and fir and more suitable for ticks. Climate change is threatening our jobs, damaging our health and attacking our historic relationship to the land and sea.”
- Florida Gov. Ron DeSantis: “Our economic potential will be jeopardized if we do not solve the problems afflicting our environment and water resources. …We will fight toxic blue-green algae, we will fight discharges from Lake Okeechobee, we will fight red tide, we will fight for our fishermen, we will fight for our beaches, we will fight to restore our Everglades and we will never ever quit, we won’t be cowed and we won’t let the foot draggers stand in our way.”
State leaders are also taking action on concerns about the environment and climate change through executive orders and budget and legislative proposals. Here is a snapshot of some recent actions state leaders have taken.
A number of new governors have issued executive orders that seek to address climate change, protect clean air or water, and protect residents from toxins:
- Colorado Gov. Jared Polis issued Executive Order B 2019-002, “Supporting a Transition to Zero Emission Vehicles.”
- Florida Gov. Ron DeSantis issued Executive Order 19-12, “Achieving More Now for Florida’s Environment,” which directs the state departments of environmental protection, health, and economic opportunity to protect the state’s water resources through a range of actions, including “adamantly oppos[ing]” all off-shore oil and gas activities, including fracking.
- Florida is not the only state concerned with extraction off its coastline: South Carolina Attorney General Alan Wilson filed a motion on Jan. 7, 2019, to block seismic testing and drilling off South Carolina’s coast. The state joined a lawsuit against the federal government filed by some of the state’s local governments and the South Carolina Small Business Chamber of Commerce.
- Maine Gov. Janet Mills’ executive orders include 5 FY 19/20, “An Order to Study the Threats of PFAS [Per- and polyfluoroalkyl] Contamination to Public Health and the Environment,” which creates a task force to study the risks posed by certain industrial chemicals that have been found in water and soil. Executive Order 3 FY 19/20, “An Order Concluding the Maine Wind Advisory Commission and Wind Permit Moratorium,” ends a moratorium that had prohibited the state from considering new wind turbine permits.
- New Mexico Gov. Michelle Lujan Grisham issued 2019-003, an “Executive Order on Addressing Climate Change and Energy Waste Prevention,” which establishes a Climate Change Task Force. It also directs all state agencies to evaluate the impact of climate change on their operations and integrate into their programs strategies to mitigate climate change.
- Virginia Gov. Ralph Northam’s executive orders include “Increasing Virginia’s Resilience to Sea Level Rise and Natural Hazards,” which directs state agencies to plan for increases in extreme weather and natural disasters attributable to climate change.
Some state legislators across the country are introducing bills designed to protect the environment by promoting clean or renewable energy. A small sample of the bills include the following:
- Colorado’s HB 19-1261, “Climate Action Plan to Reduce Pollution,” would establish greenhouse gas reduction targets, and specify considerations for the state air quality commission to take into account when setting rules and policies to reduce greenhouse gasses. At the time of writing, the bill was awaiting the governor’s signature.
- Maine Gov. Janet Mills signed “An Act to Prohibit the Use of Certain Disposable Food Service Containers,” which bans single-use food containers made of polystyrene, which is also referred to as Styrofoam. She also signed LD 216, which protects water quality in shoreland areas.
- Maryland Gov. Larry Hogan signed the Clean Cars Act of 2019 (HB 1246), which expands the tax credit for purchasing electric vehicles, and doubles the funding for the program to $6 million.
- In Nevada, Gov. Steve Sisolak signed SB358 into law on Earth Day. It requires that 50 percent of electricity generated, acquired, or saved by 2030 come from renewable sources or efficiency measures.
- Virginia Gov. Ralph Northam signed SB 1355 “Coal Combustion Residuals Impoundment; Closure,” into law on March 19, 2019. It requires owners or operators to close coal ash ponds at certain locations within the Chesapeake Bay watershed.
A number of state budget proposals aimed to ensure funding for the environmental priorities governors outlined in their speeches. A small, non-representative sample of these proposals includes:
- The Florida budget, which was awaiting the governor’s signature at the time of writing, includes $682 million to protect the state’s water resources, including Everglades restoration, according to the chair of the House Agriculture and Natural Resources Appropriations Subcommittee.
- Maryland’s enacted budget includes a $20.2 million special fund appropriation for renewable and clean energy programs and incentives, and requires reporting on Chesapeake Bay restoration efforts.
- Utah legislators appropriated more than $28 million for air quality initiatives, according to the state’s department of environmental quality.
- The Wisconsin executive budget act (SB 59), pending at time of writing, would increase general obligation bond authority for the Safe Drinking Water Loan Program for municipal drinking water infrastructure, and for the Clean Water Fund Program, which funds local government pollution and sewage projects.
Cross-Agency Environmental Initiatives
A number of states are establishing environmental task forces or committees that draw on the expertise of a number of agencies and disciplines within each state:
- Florida’s Executive Order 19-12 calls for a Blue-Green Algae Task Force.
- Maine introduced LD 1284/HP 926, “An Act to Create the Science and Policy Advisory Council on the Impact of Climate Change on Maine’s Marine Species.”
- New Mexico’s Executive Order 2019-003 established an interagency Climate Change Task Force.
- Virginia’s Executive Order 29 established the Virginia Council on Environmental Justice.
- Wisconsin established the Speaker’s Task Force on Water Quality.
These examples demonstrate how states are taking concrete policy steps to further environmental protection agendas. They also illustrate how states can use their policy levers to tackle one of the thorniest health issues facing states, the nation, and the world.
This is the first in a series exploring how state leaders can improve the upstream factors affecting health, such as clean air, safe housing, and quality early education.
This series is produced in partnership with the de Beaumont Foundation.
State policymakers spent their summer crafting policies to educate and protect consumers in response to federal actions that threaten to alter state individual insurance markets. In recent months, the federal government issued new rules expanding the availability and sale of association health plans and short-term, limited duration plans and passed legislation effectively eliminating the individual mandate that required all consumers to purchase insurance.
While proponents claim the sale of these new association and short-term plans provide more low-cost choices for consumers, opponents express concerns that the plans do not comply with Affordable Care Act (ACA) mandates and may provide significantly fewer benefits (such as coverage of pre-existing conditions) that could destabilize state’s individual markets. (For more information, read The New Association Health Plan Rule: What Are the Issues and Options for States and Lower-Cost, Short-Term Insurance Plan Approved, But at What Cost to State Markets and Consumers?)
Below is a summary of recent state administrative and legislation actions taken in response to new federal changes:
Short-term Insurance Policies
- California’s legislature passed a bill to prohibit the sale of short-term, limited duration health insurance in the state. The bill is expected to be signed by the governor.
- Iowa issued proposed rules to align Iowa regulations with the new federal regulation granting longer terms and renewability of short-term plans. The regulation adds benefit, coinsurance, and dollar limit, minimum requirements for short-term plans. The rule establishes a 10-day cancellation period during which an enrollee can cancel coverage after enrollment, and it prohibits rescissions (when insurers rescind a plan and don’t have to make payments) and underwriting based on claims made after-enrollment. It also includes explicit language defining the warning information short-term plans must communicate to enrollees about their coverage.
- Washington State’s Insurance Commissioner Mike Kreidler has filed proposed rules to restrict the sale of short-term, limited duration insurance medical plans. The rule outlines specific benefits that must be covered by short-term plans, stipulates that plans can only cover a three-month period, prohibits plan renewals, prevents rescissions except in cases of fraudulent activity by the enrollee, and requires that all short-term plans are filed and approved by the insurance commissioner. The rule also includes specific and comprehensive language that all short-term plan carriers must include in their disclosure notices to all consumers who apply for a short-term plan.
- Connecticut issued a bulletin asserting the applicability of essential health benefits (mandated by the ACA) and pre-existing condition protection requirements to short-term plans as specified under Connecticut law.
- Pennsylvania’s Insurance Commissioner Jessica Altman announced filing requirements for short-term plans, so the state is able to review short-term plans that are offered under the new federal rules. The announcement also included a caution to consumers about the limits of these plans, with links to an educational brochure to help consumers compare short-term plans with other forms of coverage.
- The Colorado Department of Regulatory Agencies issued a consumer advisory on short-term plans, including a comparison of ACA-compliant insurance and short-term plans, an explanation of the risks from out-of-pocket spending that can accompany short-term plans, and resources for consumers to consult to help them understand their insurance options.
- Montana published guidance summarizing the new federal rule on short-term plans, with links to applicable state legislation and regulation governing short-term plans.
- Indiana and South Carolina issued similar educational bulletins, clarifying that federal regulations do not pre-empt existing state laws that regulate short-term plans.
- The Minnesota Commerce Department issued an FAQ for consumers about short-term plans, explaining the new federal rule and Minnesota law.
Association Health Plans (AHPs)
- Vermont issued emergency and proposed rules in response to the new federal AHP. The new rules impose regulations on AHPs, including:
- A prohibition on AHP rating based on demographic, or health status;
- A requirement that AHPs offer coverage to all people and dependents within an association;
- A mandate that AHPs meet Medical Loss Ratio rebate requirements; and
- Minimum benefit offerings.
The rule also extends the authority of Vermont’s insurance commissioner to conduct oversight over AHPs.
- Pennsylvania sent a letter to the US Department of Health and Human Services outlining the state’s interpretation of its authority in governing AHPs given existing state laws under the new federal AHP regulation. The US Department of Labor later affirmed Pennsylvania’s existing authority to regulate AHPs, as interpreted in the letter.
- Iowa issued new rules to assert “membership stability” requirements for associations, intended to protect consumers who participate in an AHP.
- New Hampshire announced plans to convene a working group of stakeholders to develop legislation that will set clear standards for AHPs sold in the state. It also released guidance to clarify the relationship between AHPs and the Employee Retirement Income Security Act (ERISA).
- Connecticut, Idaho, Louisiana, Maryland, and New Hampshire issued bulletins or guidance clarifying how state law works to regulate AHPs in conjunction with the new federal AHP rule, primarily clarifying where state law is not preempted by the new federal AHP rule.
- California’s legislature has passed a bill that prohibits the sale of group health insurance plans (such as AHPs) to a sole proprietorship or partnership without employees, limiting the effects of the new federal regulation which does allow for these sales. SB 1375 now awaits the governor’s signature.
- Washington, DC enacted an individual responsibility requirement, largely modeled after the ACA. The requirement, included as part of its 2019 Budget Support Act, will go into effect in January 2019. (For details, see DC Health Benefit Exchange Authority Executive Director Mila Kofman’s slides from the National Academy for State Health Policy’s (NASHP) 2018 annual conference.
NASHP will continue to track and report on new developments as states continue to weigh options and strategies to stabilize their markets and offer choice and affordable coverage to their consumers.
Last week, the Department of Labor released its final rule regulating association health plans (AHPs). The rule is part of the Trump Administration’s multi-pronged strategy to revise regulations governing AHPs, short-term insurance, and health reimbursement arrangements (HRAs) to promote health care competition and choice.
The rule is expected to reshape state insurance markets and impact enrollment in health insurance marketplaces. Below, the National Academy for State Health Policy (NASHP) highlights significant issues and options for state policymakers as they consider their response to the new rule. NASHP will continue to monitor states’ responses to the AHP rule. A more detailed summary of the rule is available in the journal Health Affairs.
The rule eases requirements on associations that can lead to an increase in AHP enrollment and a disruption in state insurance markets.
The primary goal of the AHP rule is to increase access to AHPs. The rule increases flexibility over what constitutes an association, which allows for more associations to form. The burgeoning associations can then offer AHPs to their members. The rule:
- Allows associations to form for the primarily purpose of offering health insurance, which was previously prohibited;
- Revises the “commonality of interest standard” so that associations can be composed of members who are in the same trade, industry, line of business, or who have a principal place of business within the same state or metropolitan area; and
- Allows “working owners” — self-employed individuals or individuals who have ownership rights in a trade or business that earn income and work at least 80 hours a month — to participate in a group AHP. These sole proprietors previously purchased health insurance in the individual market, a market regulated by states.
In most cases, AHPs are exempt from many of the regulatory requirements imposed on other health plans. While regulation of AHPs varies from state to state, AHPs that qualify for large-group status are exempt from meeting many minimum federal requirements, including the requirement that plans cover all 10 essential health benefits (e.g., hospitalization, maternity care, mental health and substance use services, and prescription drugs). These AHPs would also be exempt from adhering to non-discrimination protections, such as some community rating restrictions that require individuals to pay the same premium rate for insurance regardless of factors such as age, gender, or geographic location.
|Non-discrimination protections for health status
To partially address concerns about related to discriminating based on health status, the rule prohibits associations from conditioning membership in that association based on any health factor. It also prohibits AHPs from adjusting eligibility, enrollment, benefits, or premiums for an individual based on a health factor.
The rule does allow an AHP to vary benefits, premiums, etc. between groups of individuals in the AHP. AHPs have broad discretion in defining these groups; for example, groups may be created based on geographic regions, professional categories (e.g., job types), or hourly status (e,g., part-time and full-time workers). An AHP is prohibited from making group distinctions based on a health factor, although the loose definitions used to define groups opens the AHP to de facto discrimination based on health status, even if that is not the stated intent of the grouping structure.
The rule allows that AHPs may continue to exist under the definitions and regulations in place prior to the effective date of this rule, meaning that any new or existing AHPs that meet prior AHP standards do not have to adopt new non-discrimination protections.
Because AHPs do not have to meet these requirements, they are able to offer cheaper products with skimpier coverage to consumers — products that may be especially attractive to younger and healthier individuals. Because AHPs can be sold across state lines, they can locate their headquarters in (and therefore leverage) states with less restrictive insurance rules and/or form in ways that “cherry pick” healthy populations from across states. (This practice may proliferate due to the rule’s allowance that associations can form based on common metro-areas, even when they cross state boundaries.) These features, collectively, are expected to siphon healthy consumers out of state markets. While estimates indicate that some of these individuals who purchase AHPs will have been uninsured, the majority will be drawn out of states’ individual and small group insurance markets, causing market segmentation and disruption, in turn leading to cost increases and instability. This rule makes it possible, for the first time, for self-employed individuals to leave the individual market and buy an AHP.
Lax rules diminish consumer protections and weaken long-term market stability.
The AHP changes do not consider long-term impacts on market risk, which requires a balance of consumers to ensure that premiums stay as low as possible over the lifetime of a population. These changes also add fragility to states’ individual markets, which have already been weakened by Congressional elimination of the individual mandate penalty.
Beyond the issues raised by market segmentation, experts have also raised concerns that lack of minimum benefit standards will leave consumers vulnerable to high out-of-pockets costs. Moreover, lax-rating rules promote discriminatory pricing practices based on factors such as age, gender, or other population characteristics. The rule does include a new provision designed to protect against discrimination based on health status (see Box), however these protections are loosely defined and are not extended to all AHPs. Without sufficient oversight, experts predict it could be easy for some associations to bypass these protections.
The new rule affirms a state’s role in regulating AHPs and conducting AHP oversight.
State authority to regulate AHPs is limited and varies depending on whether the AHP meets “large-group status” and whether the association is fully- or self- insured. (For example, whether the association contracts with an insurer to provide insurance policies to its members, or whether the association develops and offers its own policy direct to members). AHP regulation largely falls under the Employee Retirement Income Security Act (ERISA). The law defines specific ways that states can regulate multiple employer welfare arrangements (MEWAs) — benefit arrangements provided to multiple employers (including the self-employed) in an association — which includes AHPs. States have authority to regulate self-insured MEWAs, as long as state laws are “not inconsistent” with ERISA. States can regulate fully-insured MEWAs on issues related to financial accountability, state licensure, registration, certification, auditing, and maintenance of specific contribution and reserve standards. States also have the authority to regulate the insurers that sell policies to associations and the policies themselves.
The rule repeatedly affirms that it “does not modify or otherwise limit existing state authority” to regulate AHPs. The rule also claims that it “broaden[s] the flexibility of states to tailor their laws and regulations to their local market conditions and preferences,” suggesting that states can use their regulatory authority to “optimize” the role of AHPs in their markets. The rule underscores:
- States’ abilities to regulate self-insured MEWAs;
- States’ capacities to enact policies to prevent risk segmentation; and
- States’ abilities to mandate benefits and rating rules for policies procured by fully-insured AHPs and self-insured MEWAs, including requirements “similar to those applicable to the small group and individual” markets.
Contrary to these assertions, the rule notes an ERISA provision that allows the federal government to preempt state laws over fully-insured AHPs that “go too far… in ways that interfere with the important policy goals advanced by this final rule.” This gives the federal government wide latitude to intervene if a state tries to implement policies restricting fully-insured AHPs from operating in their markets.
In addition to emphasizing the role of states in regulating AHPs, the rule also stresses the role states will play in oversight and enforcement efforts to protect consumers against fraud, abuse, and mismanagement of AHPs. The rule offers vague language describing actions the federal government may perform to oversee AHPs, stating that the Department of Labor “anticipates close cooperation” with state regulators in areas of oversight. The rule also expresses intent by the Department of Labor to review AHP reporting requirements and to consider developing AHP audit requirements “if necessary.” Without additional specifics about the federal role, questions arise about what role states should play in oversight and how states can best target their limited resources to avoid duplicating possible federal action.
Staggered effective dates and next steps for states.
The rule sets staggered implementation dates for the rule, depending on the type of AHP that adopts the new standards. Any association may establish a fully-insured AHP as soon as Sept. 1, 2018. Associations in existence at the time of the release of this rule may establish a self-funded AHP on Jan. 1, 2019, and new associations may establish a self-funded AHP on April 1, 2019. These dates give little time for states to act before new AHPs enter their markets. The timing is also noteworthy as the rule was released in the middle of states’ 2019 rate-filing deadlines. Officials expect that negotiations will factor in the assumption that AHPs will enter states’ markets in 2019, leading to additional rate increases before premiums are finalized in September, 2018.
The ultimate effect of the AHP rule will vary based on each state’s insurance markets and regulatory capacity. As states analyze the rule and its projected impact, future actions and considerations for policymakers and regulators include:
Review and development of state-level mandates. As noted earlier, states vary in how state-level mandates for insurance are applied to AHPs, or insurers that sell policies to associations. In order to promote fair market competition and guarantee that consumers are guaranteed similar protections across their markets, states may seek to revise or strengthen their regulation of AHPs. Moreover, rising health care costs, including prescription drugs, expose consumers to added financial risk, especially if drug coverage and other services are not covered by an insurance plan. States may look to develop solutions (such as benefit mandates or development of high-risk pools) that will help shield consumers who become underinsured by purchasing an AHP. During a recent NASHP webinar, experts discussed other state options to limit AHPs, including prohibiting new MEWAs and actions to assert jurisdiction over plans sold in their markets, even when the plans are based in another state.
Boosting state capacity for AHP oversight. While federal rules indicate that the Department of Labor and states have joint-responsibility over AHP oversight, historically, oversight of AHPs has been lax, allowing for fraud, abuse, and insolvency. To effectively protect consumers, states may need to bolster their insurance regulators’ capacity to review and audit AHPs. States may also consider increasing the ability of their state agencies to collect and respond to consumer complaints about unregulated or fraudulent products entering their markets. However, without additional funding, states may have limited capacity to devote the resources necessary to conduct robust oversight. Consumer education will also be critical to make sure consumers are aware that if they buy AHPs that do not provide full coverage of essential benefits that they cannot purchase an Affordable Care Act-compliant plan with full coverage until the annual open enrollment period.
While most state legislative sessions have ended for 2018, states may direct their agencies to implement regulatory changes that could be used to protect consumers and strengthen their markets. In the months ahead, NASHP will continue to track state actions to address the AHP rule, especially as legislators prepare for 2019 sessions following the November 2018 election.
Experts and state officials share what impact this rule will have on their insurance markets and what actions they are taking to protect consumers during two sessions at NASHP’s annual conference. Register today!
Making Waves in the Individual Market: How Did We Get Here?
The individual insurance market is experiencing seismic shifts due to the effective repeal of the individual insurance mandate and new federal policies that promote association health plans and short-term insurance policies. Kevin Lucia of the Georgetown University Center on Health Insurance Reforms reviews some of the major changes affecting insurance markets, including trends in rate filings and enrollment estimates. State officials reflect on what the changes have meant for their insurance markets, and what they expect to see during the 2019 open enrollment season.
Sailing the Seas: State Efforts to Stabilize the Individual Market
In the face of rising health insurance costs and unstable markets, states are exploring a wide assortment of strategies to stabilize markets, reduce costs, and improve coverage choices for consumers. Building on the earlier Making Waves in the Individual Market session, state panelists take a deep dive into the strategies they are advancing to bolster their markets, including passage of state-based individual mandates, reinsurance programs, and regulation of insurance products sold within or outside of the Affordable Care Act insurance marketplaces.
When states pass laws designed to control prescription drug costs, the pharmaceutical industry often responds with lawsuits claiming states are hindering interstate commerce and violating the federal Dormant Commerce Clause (DCC). NASHP’s legal experts believe states can craft drug cost policies that can withstand industry challenges.
This brief by Anna Zaret and Darien Shankse provides insight and analysis about DCC case law and highlights what state policymakers need to consider when drafting drug cost polices.
Click here to read NASHP’s blog to learn more about the Dormant Commerce Clause and drug cost regulation.
Click here to view NASHP’s easy-to-understand table featuring Dormant Commerce Clause’s “Dos and Don’ts.”