e-Texas e-Texassmaller smarter faster governmentDecember, 2000
Carole Keeton Rylander
Texas Comptroller of Public Accounts

Recommendations of the Texas Comptroller

Chapter 8: Health and Human Services

Create Fully-Insured Association Health Plans for Small Businesses


Almost three-fourths of Texas’ small businesses do not offer health insurance to their employees. Such businesses cannot take advantage of the same options that large businesses use to reduce their employee health insurance premiums. State law should be changed to allow small businesses to form fully-insured associations to acquire or issue insurance, giving them the options already available to large businesses to reduce costs while preserving adequate safeguards for health care consumers.


Many employees of small businesses are uninsured. In 1998, about 38 percent of employees in Texas businesses with fewer than 25 workers were uninsured, compared to less than 18 percent in businesses with 500 or more employees.[1] More than three-fourths of Texas’ 366,000 small employers do not provide employee health insurance.[2]

Federal law allows large companies to become self-insured—that is, to offer their own employee insurance backed with their own resources, and to control their costs by deciding what sort of coverage to offer. Small companies cannot afford to cover risk in this way and do not have options available to large businesses that would allow them to reduce their costs. Instead, they must purchase insurance from insurance companies at rates higher than those paid by large businesses. Furthermore, if even one or two of their employees incur high medical expenses, those rates are likely to rise significantly, pricing small businesses out of the insurance market entirely.

If small employers could join together to form larger risk pools, they could minimize the sharp rises in premium costs that occur if several employees experience high medical expenses. Such pools could negotiate volume discounts from insurers and achieve economies of scale in administrative costs. In addition, they would not not be subject to some federal and state mandates, such as those requiring certain types of treatment or provider types to be covered, and could have legal immunity from being sued under state common law, since self-insurers can be sued only for claims for which they have contracted to pay. Large companies that become self-insured are not currently required to meet mandates and can avoid lawsuits. Small business pools level the differences between small businesses and large businesses.

At the national level, the National Federation of Independent Business (NFIB), an association representing 600,000 owners of small and independent businesses that employ more than 7 million people, has proposed federal legislation allowing the creation of association health plans (AHPs). AHPs, which could be formed by groups of small business employers or employees, would allow small businesses to expand their health care choices and lower their costs by pooling their purchasing power. AHPs should encourage greater competition for the small employer health insurance market.[3] An AHP proposal has been passed in a House provision that would exempt AHPs from most state regulations.

AHPs have been accused of presenting the same risks as the Multiple Employer Welfare Associations (MEWAs).[4] In the past, some MEWAs have gone bankrupt, leaving their members with unpaid claims, and some have been used fraudulently, earning them a bad reputation with state regulators.

Texas, however, could ensure the solvency of AHPs by enforcing stringent solvency and reserve standards not required of MEWAs under federal law. The plans would be called “fully-insured AHPs” because they would be required to purchase standard group policies or to self-insure and purchase reinsurance—a policy to protect the association from costs in excess of its resources—to fully cover the costs of the plan.

If a consumer has a complaint about a claim under an AHP, they would call the Texas Department of Insurance (TDI), which has regulatory authority over state-licensed insurers including those that provide stop loss coverage and third-party administration.


State law should be amended to allow groups of employers or employees to form fully-insured association health plans (AHPs).

AHPs could choose either to purchase standard group health insurance or to self-insure and purchase stop-loss or similar coverage to protect their resources and their beneficiaries. Either option would demonstrate that they were fully insured under federal law.[5]

To demonstrate that an association plan is fully insured, with the loss set at zero percent, the association would have to demonstrate that:

  • it has entered into a 100 percent stop-loss (or similar coverage) agreement with an insurer licensed to do business in Texas.
  • the insurer is rated B+ or better by BEST (an industry rating standard).
  • the insurer providing the stop-loss coverage possesses at least $25 million of policyholder or contributed surplus.
  • the insurer providing the stop-loss coverage is obligated under the agreement to serve as the third-party administrator responsible for handling claims under the association plan.
  • in the event the plan is unable to pay a claim for any reason, the provider of the stop-loss coverage is directly liable to the participant under its agreement with the AHP.
  • the insurer providing stop-loss or similar coverage for the AHP pays premium taxes on any and all consideration received from the association for that agreement.

TDI would continue to monitor the solvency of the insurance company that provides stop-loss coverage and acts as claims administrator as part of its regular examination process.

Fiscal Impact

Premium taxes collected from plans currently insured would continue to be paid on the stop-loss or similar coverage. While there could be some premium tax loss attributable to the lower premium costs enjoyed by the AHPs, to the extent that additional businesses would choose to provide insurance, premium tax revenues could increase. The net effect would be expected to be close to revenue neutral.

[1] Ken McDonnell and Paul Fronstin, EBRI Health Benefits Data Book, Employee Benefit Research Institute: Washington, D.C., 1999, p. 72; Texas Health and Human Services Commission, “Estimated Distribution of Texas Uninsured Workers According to Company Size in 1998,” (Handout prepared by Research Department, Fiscal Policy Division, Austin).

[2] Texas Department of Insurance, “Texas Small Employer Health Insurance Enrollment Statistics, 1993-1998,” Austin, Texas. (Handout.)

[3] National Federation of Independent Businesses, “Health Care: Critical Point In Health Care Debate Has Arrived!” September 18, 2000 (http://www.nfib.com/policy/index.asp?ContNF=take_action/healthcare/index.htm). (Internet document.)

[4] “War of Words Heating Up Over Managed Care Reform,” National Journal’s Congress Daily (July 20, 2000).

[5] 29 U.S.C. § 1144 (b)(6)(A).

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

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