[House Report 109-41]
[From the U.S. Government Publishing Office]



109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     109-41

======================================================================



 
               SMALL BUSINESS HEALTH FAIRNESS ACT OF 2005

                                _______
                                

 April 13, 2005.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Boehner, from the Committee on Education and the Workforce, 
                        submitted the following

                              R E P O R T

                             together with

                     ADDITIONAL AND MINORITY VIEWS

                        [To accompany H.R. 525]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Education and the Workforce, to whom was 
referred the bill (H.R. 525) to amend title I of the Employee 
Retirement Income Security Act of 1974 to improve access and 
choice for entrepreneurs with small businesses with respect to 
medical care for their employees, having considered the same, 
report favorably thereon without amendment and recommend that 
the bill do pass.

                                Purpose

    The purpose of H.R. 525 is to reduce the ranks of the 
uninsured by improving access to health care for uninsured 
working families, particularly those who are employed in small 
businesses. The bill would authorize the creation of 
association health plans (``AHPs'') which would allow small 
businesses to join together through bona fide trade 
associations to purchase health insurance for their workers, 
thus enjoying the larger economies of scale presently enjoyed 
by many large corporations and unions and enabling them to 
purchase coverage at a lower cost than they currently must pay. 
H.R. 525 would increase small businesses' bargaining power with 
health care providers, give them freedom from costly state 
mandated benefit packages, and lower overhead costs, thus 
better enabling them to offer health care coverage for their 
workers.

                            Committee Action

    Employer-Employee Relations Subcommittee Chairman Sam 
Johnson, (R-TX) introduced H.R. 525 on February 2, 2005 along 
with 53 bipartisan original cosponsors including Education and 
the Workforce Committee Chairman John Boehner; the number of 
bipartisan cosponsors rose to 121 by the time the bill was 
reported by the Committee to the full House of Representatives. 
The bill is the culmination of legislative activity started by 
the Committee in the 104th Congress through the present 109th 
Congress.

                             104TH CONGRESS

    The Subcommittee on Employer-Employee Relations held an 
oversight hearing entitled ``Health Insurance Reform--The ERISA 
Title I Framework: A 20-Year Success Story'' on February 14, 
1995. Testimony was received from: Representative Pat Williams; 
Former Representative John Erlenborn; Frank Cummings, Esq., 
LeBoeuf, Lamb, Greene & MacRae; Randal Johnson, Director of 
Benefits Planning, Motorola, Inc.; Ralph Brennan, President, 
Mr. B.'s Inc.; William Goodrich, President, United Agribusiness 
League; and Brian Atchinson, Vice President, National 
Association of Insurance Commissioners, Superintendent, Bureau 
of Insurance, State of Maine.
    On February 21, 1995, H.R. 995, the ERISA Targeted Health 
Insurance Reform Act was introduced by then Chairman of the 
Subcommittee on Employer-Employee Relations, Representative 
Harris Fawell with 15 original cosponsors. The Subcommittee on 
Employer-Employee Relations held a hearing on this bill on 
March 10, 1995. Witnesses at the hearing were: Jack Faris, 
President, National Federation of Independent Business; Jerry 
Jasinowski, President, National Association of Manufacturers; 
Sean Sullivan, President and CEO, National Business Coalition 
on Health; Timothy Flaherty, American Medical Association; 
Charles Masten, Inspector General, Department of Labor; Gerald 
McGeehan, Graphic Arts Benefits Corp; Kala Ladenheim, 
Intergovernmental Health Policy Project, George Washington 
University; and Judith Waxman, Director of Government Affairs 
of Families, USA. A second hearing was held on H.R. 995 on 
March 28, 1995. Testimony was presented by: Richard Lesher, 
President, U.S. Chamber of Commerce; Keith Richman, President, 
Medco Associates, Inc.; Jon Reiker, Vice President, Benefits, 
General Mills Restaurants, Inc.; Frank Cummings, Esq., LeBoeuf, 
Lamb, Greene & MacRae; and Lee Douglas, Insurance Commissioner 
of Arkansas, President, National Association of Insurance 
Commissioners.
    The Committee on Economic and Educational Opportunities 
(the previous name of the Committee on Education and the 
Workforce) on March 6, 1996 discharged H.R. 995 from the 
Subcommittee on Employer-Employee Relations, approved H.R. 995 
as amended by voice vote, and, by a rollcall vote of 24 ayes to 
18 nays, ordered the bill favorably reported to the House of 
Representatives. However, the bill was not considered by the 
House before the conclusion of the 104th Congress.

                             105TH CONGRESS

    On May 1, 1997, H.R. 1515, the Expansion of Portability and 
Health Insurance Coverage Act of 1997 (``EPHIC'') was 
introduced by Representative Harris Fawell with 136 bipartisan 
original cosponsors.
    The Subcommittee on Employer-Employee Relations held a 
legislative hearing on H.R. 1515 on May 8, 1997. Testimony was 
received from: Representative James P. Moran (D-VA,); Jack 
Faris, President and CEO, National Federation of Independent 
Business; Mary Castro, Vice President, Employee Benefits, 
Independent Grocers Alliance, Inc.; Cathy Hurwit, Deputy 
Director, Citizen Action; Kathleen Sebelius, Commissioner of 
Insurance, State of Kansas; Donald Dressler, President of 
Insurance Services, Western Growers Association, on behalf of 
The Association Healthcare Coalition; and Jeffrey H. Joseph, 
Vice President, Domestic Policy, U.S. Chamber of Commerce.
    On June 11, 1997, the Committee on Education and the 
Workforce discharged H.R. 1515 from the Subcommittee on 
Employer-Employee Relations. The full Committee approved the 
bill as amended on a voice vote and by a vote of 24 ayes to 20 
nays ordered the bill favorably reported, and: (a) incorporated 
into subtitle D of the reconciliation package transmitted to 
the Budget Committee; and (b) reported as amended to the House 
of Representatives. The bill became part of H.R. 2015, the 
Balanced Budget Act of 1997, which passed the House of 
Representatives on June 25, 1967 on a vote of 270 yeas to 162 
nays; however, association health plan provisions were deleted 
during House/Senate conference on the bill. A version of the 
association health plan provisions of the bill was then 
incorporated into H.R. 4250, the Patient Protection Act of 
1998, which was introduced by Representative Newt Gingrich, 
then Speaker of the House of Representatives, on July 16, 1998. 
On July 24, 1998, the House of Representatives passed the bill, 
including a version of the provisions of H.R. 1515, by a vote 
of 216 yeas to 210 nays. On October 9, 1998, the Senate tabled 
consideration of the measure by a vote of 50 yeas to 47 nays.

                             106TH CONGRESS

    On March 25, 1999, the Subcommittee on Employer-Employee 
Relations held a hearing on ``Expanding Affordable Health Care 
Coverage: Benefits and Consequences of Association Health 
Plans.'' Witnesses at the hearing were: Ms. Mary Nell Lehnhard, 
Senior Vice President Policy and Representation, BlueCross 
BlueShield Association, Washington, DC; Ms. Victoria Caldeira, 
Manager of Legislation Affairs, National Federation of 
Independent Business, Washington, DC; Mr. Donald G. Dressler, 
CAE President for Insurance Services, Western Growers 
Association, Newport Beach, CA; and Mr. Steven B. Larsen, 
Commissioner of Insurance State of Maryland, Baltimore, MD, 
testifying on behalf of the National Association of Insurance 
Commissioners.
    On April 20, 1999, Representative Jim Talent (R-MO) 
introduced H.R. 1496, the Small Business Access and Choice for 
Entrepreneurs Act of 1999 with 13 bipartisan original 
cosponsors. H.R. 1496 was incorporated into H.R. 2990, a 
broader health care reform package introduced by Representative 
Talent on September 30, 1999. H.R. 1496 passed the House of 
Representatives on a vote of 227 yeas to 205 nays on October 6, 
1999. After Senate passage of a similar bill, S. 1344, a House-
Senate conference did not reach agreement before the end of the 
106th Congress.

                             107TH CONGRESS

    Representative Ernie Fletcher (R-KY) introduced H.R. 1774, 
the Small Business Health Fairness Act of 2001, on May 9, 2001 
with 46 bipartisan original cosponsors.
    On July 19, 2001, Representative Greg Ganske (R-IA) 
introduced H.R. 2563, a broad health care reform package. 
During the House of Representatives consideration of H.R. 2563, 
an amendment to include the provisions was adopted on a vote of 
236-194. H.R. 2563 passed the House on August 2, 2001, by a 
vote of 226 ayes to 203 nays. The bill was not taken up by the 
Senate before the conclusion of the 107th Congress.
    On June 18, 2002, the Subcommittee on Employer-Employee 
Relations held a hearing on ``The Rising Cost of Health Care: 
How are Employers and Employees Responding?'' Witnesses at the 
hearing were: Dr. Paul Ginsburg, President, Center for Studying 
Health System Change, Washington, DC; Ms. S. Catherine Longley, 
Commissioner, Maine Department of Professional and Financial 
Regulation, Augusta, ME; Dr. Henry Simmons, President, National 
Coalition on Health Care, Washington, DC; Mr. Patrick McGinnis, 
CEO, Trover Solutions, Louisville, KY; Ms. Carol Miller, 
Frontier Education Center, Santa Fe, NM; and Ms. Cathy A. 
Streker, Director of Employee Benefits and Planning, Textron, 
Inc., Providence, RI.
    On July 9, 2002, the Subcommittee on Employer-Employee 
Relations held a hearing entitled ``Expanding Access to Quality 
Health Care: Solutions for Uninsured Americans.'' Testimony at 
the hearing was received from: Representative Ernie Fletcher 
(R-KY) and Representative John Tierney (D-MA); Dr. Mark B. 
McClellan, Member, Council of Economic Advisors, Washington, 
DC; Mr. Harry Kraemer, Jr., Chairman and Chief Executive 
Officer, Baxter International Inc., Deerfield, IL, testifying 
on behalf of The Healthcare Leadership Council; Mr. Joseph 
Rossman, Vice President of Fringe Benefits, Associated Builders 
and Contractors, Rosslyn, VA, testifying on behalf of the 
Association Health Plan Coalition; and Mr. Ron Pollack, 
Executive Director, Families USA, Washington, DC.

                             108TH CONGRESS

    On February 11, 2003, Rep. Ernie Fletcher introduced H.R. 
660, the ``Small Business Health Fairness Act of 2003'' with 70 
bipartisan original cosponsors. The Subcommittee on Employer-
Employee Relations held a hearing on H.R. 660 on March 13, 
2003. Witnesses at the hearing presenting testimony were: the 
Honorable Ann L. Combs, Assistant Secretary of Labor, Employee 
Benefits Security Administration, Washington, DC; Ms. Phyllis 
Burlage, Burlage Associates, PA, Millersville, MD, testifying 
on behalf of the National Federation of Independent Business; 
Alice Weiss, Esq., Director of Health Policy, National 
Partnership for Families, Washington, DC; and Mr. Greg 
Scandlen, Director, Center for Consumer Driven Health Care, The 
Galen Institute, Alexandria, VA.
    The Subcommittee on Employer-Employee Relations reported 
H.R. 660 by a bipartisan vote of 13 yeas to 8 nays on April 8, 
2003. On June 12, 2003, the Committee on Education and the 
Workforce ordered H.R. 660, as amended, reported to the House 
of Representatives by a vote of 26-21. On June 19, 2003 the 
House of Representatives passed H.R. 660 by a vote of 262-162. 
On May 15, 2004, to reiterate its commitment to helping the 
uninsured, the House passed identical legislation, H.R. 4281. 
Neither bill was enacted into law before the end of the 108th 
Congress.

                             109TH CONGRESS

    On February 2, 2005, Employer-Employee Relations 
Subcommittee Chairman Sam Johnson (R-TX) introduced H.R. 525, 
the Small Business Health Fairness Act, along with 53 
bipartisan original cosponsors, including Education and the 
Workforce Committee Chairman John Boehner, and Representatives 
Nydia Velazquez (D-NY) and Albert Wynn (D-MD). On March 16, 
2005, the Committee on Education and the Workforce ordered H.R. 
525, without amendment, favorably reported to the House of 
Representatives by a vote of 25-22.

                                Summary

    The Small Business Health Fairness Act addresses both the 
access and cost issues at the heart of the health care reform 
debate. The bill, introduced by a bipartisan group of 
legislators led by Employer-Employee Relations Subcommittee 
Chairman Sam Johnson (R-TX), Education and Workforce Committee 
Chairman John Boehner (R-OH), and Representatives Nydia 
Velazquez (D-NY) and Albert Wynn (D-MD), would improve access 
to quality health care for uninsured families. Specifically, it 
would authorize the creation of association health plans 
(``AHPs'') to allow small businesses to join together through 
bona fide trade associations to purchase health insurance for 
their workers at a lower cost. The measure would increase small 
businesses' bargaining power with health care providers, give 
them freedom from costly state-mandated benefit packages, and 
lower their overhead costs by as much as 30 percent--benefits 
that many large corporations and unions already enjoy because 
of their larger economies of scale.
    The bill has 129 cosponsors, including House Majority 
Leader Tom DeLay (R-TX), House Majority Whip Roy Blunt (R-MO), 
House Republican Conference Chairwoman Deborah Pryce (R-OH), 
Small Business Committee Chairman Don Manzullo (R-IL), 
Representatives Ed Case (D-HI) and Jim Cooper (D-TN). A broad 
and diverse coalition of more than 100 groups has endorsed the 
bill, including the U.S. Chamber of Commerce, the National 
Federation of Independent Business, the American Farm Bureau 
Federation, the Associated Builders and Contractors, the Latino 
Coalition, the National Black Chamber of Commerce, the National 
Association of Women Business Owners, and the National 
Restaurant Association. On February 16, 2005, Sen. Olympia 
Snowe (R-ME) introduced companion legislation in the United 
States Senate (S. 406).
    The bill establishes that an AHP is a group health plan 
that offers fully-insured and/or self-insured medical benefits, 
has been certified by the Labor Department, and is operated by 
a board of trustees with complete fiscal control and 
responsibility for all operations. The association sponsoring 
the plan must have been in existence for at least three years 
for substantial purposes other than providing health insurance 
coverage.
    To be certified by the Labor Department, a ``self-insured'' 
AHP must have at least 1,000 participants and beneficiaries. 
The self-insured AHP must have also offered benefits coverage 
on the date of enactment, represent a broad cross-section of 
industry trades, or represent one or more industry trades with 
average or above health insurance risk.
    The bill requires all employers participating in the AHP to 
be members or affiliated members of the sponsor. All 
individuals under the plan must be active or retired employees, 
owners, officers, directors, partners, or their beneficiaries.
    The measure expressly prohibits discrimination by requiring 
that all employers that are association members are eligible 
for participation, all geographically available coverage 
options are made available upon request to eligible employers, 
and eligible individuals cannot be excluded from enrolling 
because of health status. The bill prohibits AHPs from charging 
higher rates for sicker individuals or groups within the plan, 
except to the extent already allowed under the relevant state 
rating law.
    H.R. 525 makes clear that AHPs must comply with the Health 
Insurance Portability and Accountability Act (HIPAA), which 
prohibits group health plans from excluding high-risk 
individuals with high claims experience. Thus, it will not be 
possible for AHPs to ``cherry pick'' because sick or high risk 
groups or individuals cannot be denied coverage. As an 
additional protection, state-licensed health insurance agents 
must be used to distribute health insurance coverage provided 
to small employers under an AHP and must also be used to 
distribute self-insured benefits to small employers through an 
AHP.
    The bill includes solvency standards that are similar to or 
stronger than standards enacted by states for association 
plans. These new solvency protections go far beyond what is 
required of single employer and labor union plans under current 
law. H.R. 525 requires self-insured AHPs to maintain reserves 
that are sufficient for unearned contributions, benefit 
liabilities, expected administrative costs, and any other 
obligations. A qualified actuary who is a member of the 
American Academy of Actuaries must recommend these reserve 
levels.
    AHPs must also obtain aggregate and specific stop-loss 
insurance and indemnification insurance for any claims if the 
plan is terminated; they must also make annual payments to an 
Association Health Plan Fund. In addition, an AHP must maintain 
surplus reserves of between $500,000 and $2 million. If an AHP 
is unable to provide benefits when due or is otherwise in a 
financially troubled condition, the Secretary of Labor must act 
as a trustee to administer the plan for the duration of the 
insolvency. A certified AHP may terminate only if the trustees 
provide 60 days advance written notice to participants and 
beneficiaries and submit a plan for timely payment of all 
benefit obligations. The measure establishes a Solvency 
Standards Working Group within 90 days after enactment to 
recommend initial regulations.
    The bill gives certified AHPs freedom from costly state-
mandated benefit packages by exempting them from state benefit 
mandates, except that AHPs must comply with any state laws that 
require coverage of specific diseases. The measure clarifies 
that states may regulate self-insured multiple employer welfare 
arrangements providing medical care which do not elect to meet 
the certification requirements for AHPs.
    H.R. 525 requires the Labor Secretary to consult with the 
states about the regulation of AHPs located in their state. It 
establishes criminal penalties for willful misrepresentation as 
a certified AHP or collectively bargained status; authorizes 
the Department of Labor to issue cease activity orders against 
fraudulent health plans; and outlines the responsibility of the 
board of trustees for meeting required claims procedures. The 
Labor Secretary must report to Congress no later than January 
1, 2008, on the impact of AHPs on reducing the number of 
uninsured.

                     Committee Statement and Views


                 A. BACKGROUND AND NEED FOR LEGISLATION

Strengths of our nation's employer-provided health care system

    When the Employee Retirement Income Security Act (ERISA) 
\1\ was enacted in 1974, the Congress found that employee 
benefit plans, including employer provided health benefits, 
directly impacted the continued well being and security of 
millions of employees and their dependents.\2\ The well being 
of these workers and their families was of such national 
importance that Congress, through the enactment of ERISA, 
preempted the states' regulatory role in order to assure 
uniform federal standards. It is the belief of the Committee on 
Education and the Workforce (hereinafter the ``Committee''), 
that the ability to utilize uniform standards is the 
cornerstone of our nation's successful employer-provided health 
care system.
---------------------------------------------------------------------------
    \1\ 29 U.S.C. Sec. 1001, et seq.
    \2\ 29 U.S.C. Sec. 1001(a).
---------------------------------------------------------------------------
    When Congress enacted ERISA, much of the dialogue about 
employer-sponsored benefits pertained to pension plans. Today, 
more than 131 million Americans obtain their health insurance 
coverage through an employer-sponsored health plan covered 
under ERISA. This means that more Americans receive health 
benefits voluntarily provided by their employer than any other 
form of health care insurance, including Medicare and Medicaid.
    The Committee believes our nation's employer-provided 
health care system to be an enormous success story. Indeed, the 
Committee views its task with regard to this system to be to 
protect it from federal proscriptions, such as increased 
federal mandates, that cause the provision of health care 
insurance to become more costly, thereby making it more 
difficult for employers to offer health coverage to their 
employees. It is the view of the Committee that ERISA's 
preemption of state mandates and regulation has provided a 
stable framework by which employers have been able to offer 
health plans to workers and their families.
    An April 2002 study by PriceWaterhouseCoopers notes that 
state mandates have increased 25-fold over the time period from 
1970-1996.\3\ Thus, during the three decades since ERISA was 
enacted, self-insured employers offering health plans would 
have seen their regulatory and administrative burden increase 
accordingly, were it not for ERISA's preemption.
---------------------------------------------------------------------------
    \3\ PriceWaterhouseCoopers, The Factors Fueling Rising Health Care 
Costs, April 2002.
---------------------------------------------------------------------------
    Under ERISA, employers and unions offering health insurance 
products to their employees must comply with state regulation 
for these health policies. This is the result of the Supreme 
Court's ruling in Metropolitan Life Insurance Co. v. 
Massachusetts, 471 U.S. 724 (1985). In that decision, the court 
held that if an employer's health plan purchases a fully 
insured product offered by an insurer regulated by the states, 
then such insurance regulation may include imposing 
requirements that specific benefits be included in the products 
sold to the plan.\4\ These state laws then fall within the 
jurisdiction of Section 514(b)(2)(A) of ERISA, which saves any 
law of any state that regulates insurance from being preempted 
by ERISA.\5\
---------------------------------------------------------------------------
    \4\ Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724 
(1985).
    \5\ 29 U.S.C. Sec. 1144(b)(2)(A).
---------------------------------------------------------------------------
    However, when an employer or union self-funds the health 
benefits it provides to workers (i.e. taking on the risk of 
insurable events), ERISA ensures that the employer or union 
cannot be deemed to be in the business of insurance.\6\
---------------------------------------------------------------------------
    \6\ 29 U.S.C. Sec. 1144(b)(2)(B).
---------------------------------------------------------------------------
    Thus, those employers and unions who self-fund or self-
insure their benefits are able to take advantage of ERISA's 
preemption of state regulation to offer a uniform health 
benefit package that can be offered to individuals across state 
lines. Approximately 67 million of the 131 million Americans 
who obtain health insurance from their employer receive 
benefits through a self-funded plan.
    The preemption of state benefit mandates serves employers, 
unions, and employees well. PriceWaterhouseCoopers estimates 
that the 1500 state benefit mandates make up 15 percent of the 
increased cost of health insurance for 2002.\7\ These costs may 
well price many employers out of the business of offering 
insurance were it not for the opportunity to self-fund their 
health care under ERISA.
---------------------------------------------------------------------------
    \7\ PriceWaterhouseCoopers, The Factors Fueling Rising Health Care 
Costs, April 2002.
---------------------------------------------------------------------------
    However, rather than use the preemption of state benefit 
mandates to offer inferior health care to workers, unions and 
self-insured large employers offer rich benefit packages to 
their workers. As cited in a 1996 GAO report, a KPMG study 
found that self-funded plans are more likely to offer benefits 
and services that are most commonly mandated by states than 
fully insured plans.\8\ This pattern holds true for other 
benefits that are not typically mandated.
---------------------------------------------------------------------------
    \8\ US GAO ``Health Insurance Regulation--Varying State 
Requirements Affect Cost of Insurance,'' August 1996.
---------------------------------------------------------------------------
    Uniformity also provides for lower administrative costs. A 
2002 Robert Wood Johnson Research Synthesis Report cites the 
fact that administrative costs make up only 12 percent of 
health care costs for large employers. This is compared to the 
administrative costs for smaller employers that make up 40 
percent of overall health costs.\9\
---------------------------------------------------------------------------
    \9\ Robert Wood Johnson Foundation, ``Are Health Insurance Premiums 
Higher for Small Firms?'' September 2002.
---------------------------------------------------------------------------
    Employees surveyed about their health benefits conclude in 
wide majorities that they are pleased with their employer-
sponsored coverage and that they are not willing to risk losing 
this coverage in order to obtain additional mandated 
benefits.\10\ While the Committee views the history of 
employer-sponsored health benefits since the enactment of ERISA 
as a success story, the Committee acknowledges that the 
employer sponsored health care system faces challenges. In 
particular, the Committee is concerned about the issue of 
rising health care costs and the extent to which these health 
care costs result in less coverage.
---------------------------------------------------------------------------
    \10\ 2002 Health Confidence Survey, September 2002; Kaiser Family 
Foundation/Harvard School of Public Health, ``National Survey on 
Consumer Experiences With and Attitudes Toward Health Plans: Key 
Findings,'' August, 2001.
---------------------------------------------------------------------------

Challenges to employer-provided health care

    At a hearing before the Subcommittee on Employer-Employee 
Relations in June of 2002, Paul Ginsburg, President of the 
Center for Studying Health System Change, testified about the 
threat rising health costs pose to the employer-sponsored 
health care system:

          Rising health costs affect people's ability to afford 
        health insurance. When insurance premiums rise faster 
        than workers' wages, fewer people obtain employment-
        based health insurance. This happens through small 
        employers deciding not to provide coverage to their 
        employees and employees deciding not to take up 
        employer coverage because the employee contribution is 
        too high. If health care costs trends continue to 
        exceed increases in wage rates by a large margin, this 
        could result in substantial loss of employer-based 
        health insurance.\11\
---------------------------------------------------------------------------
    \11\ Hearing on ``The Rising Costs of Health Care: How are 
Employers and Employees Responding?'' before the Subcommittee on 
Employer-Employee Relations, Committee on Education and the Workforce, 
U.S. House of Representatives, 107th Congress, Second Session, June 18, 
2002.

    Catherine Longley, then Commissioner of Professional and 
Financial Regulation for the state of Maine, agreed with 
Ginsburg's testimony and shared these insights about the 
---------------------------------------------------------------------------
situation Maine employers face:

          In the State of Maine, we are facing a health care 
        cost crisis. Although health care costs have increased 
        dramatically across the country, they have increased 
        even faster in Maine. Nationally, from 1990-1998, the 
        per capital expenditures for personal health care 
        increased an average of 53.3 percent; in Maine, the 
        increase was 80.4 percent for the same period of time * 
        * * Maine employers are faced with difficult choices--
        do they continue existing policies at a significant 
        increase in cost and shift more of the cost of the 
        health insurance to employees; do they retain coverage 
        but offer higher deductible policies; do they forego 
        increasing employee salaries to maintain coverage; or 
        do they drop coverage altogether? \12\
---------------------------------------------------------------------------
    \12\ Id.

    Commissioner Longley also testified that the State of Maine 
and Independent Governor Angus King had recognized that state 
imposed benefit mandates impose significant costs on employers 
---------------------------------------------------------------------------
and took dramatic steps to address this:

          For example, in 1995, Governor King signed a 
        progressive mental health parity law that required 
        health insurance coverage for 7 specific biologically 
        based mental illnesses in policies held by employer 
        groups of 20 or more. Since that time, the King 
        Administration has grown more and more concerned about 
        the dramatic increases in health care costs and effect 
        of public policy on those increases. As a result, in 
        2002 the Administration adopted a presumption against 
        further mandates, which only the most compelling of 
        arguments should overturn. Given the circumstances this 
        year, Governor King felt that he could no longer 
        support additional mandates and accordingly, vetoed LD 
        1627, ``An Act to Ensure Equality in Mental Health 
        Coverage,'' the only health insurance mandate vetoed 
        during his nearly eight years as governor * * * it was 
        felt that Maine could ill afford any new mandate that 
        would further increase costs. As Governor King stated 
        in his April 11, 2002 veto message to the Maine 
        Legislature, ``When you are in a hole, the first rule 
        is not to dig any deeper.'' \13\
---------------------------------------------------------------------------
    \13\ Id.

    While some states have taken steps to slow the growth in 
health insurance costs, the Committee recognizes that in order 
to truly be effective Congress must past measures such as 
Association Health Plans. According to the 2004 Annual Employer 
Health Benefits Survey released by the Kaiser Family Foundation 
and Health Research and Educational Trust (HRET) the cost of 
providing health insurance increased by 11.2 percent for the 
average employer; the fourth straight year of double digit 
increases.\14\ Though 2005 premium increases have not yet been 
released, experts expect the increase to once again be in the 
double digits.
---------------------------------------------------------------------------
    \14\ Kaiser Family Foundation, Employer Health Benefits 2004 Annual 
Survey, September 2004.
---------------------------------------------------------------------------

Challenges to small employers

    Nowhere is the threat to employer-sponsored health care 
more apparent than in the situation regarding small businesses. 
For those small employers who can afford health insurance for 
their employees, a fully insured plan is often their only 
available option. The net effect of the Metropolitan Life 
decision has been to subject these smaller employers that fully 
insure to the burdens of costly state mandates, thereby making 
health insurance for their employees even less affordable than 
it is for larger employers who are not subject to state 
mandates.
    Because of their size and limited resources, self-insuring 
is not a viable option for most small firms, and thus they must 
purchase fully insured health products that are subject to 
state benefit mandates. In fact, firms with fewer than 100 
employees offered self-insured plans at just 11 percent of all 
work sites in 2000.\15\ This means that small firms bear the 
entire state regulatory burden--and the increased costs that 
accompany it--that their larger employer and union counterparts 
are able to avoid.
---------------------------------------------------------------------------
    \15\ Medical Expenditure Panel Survey from Agency for Healthcare 
Research and Quality, as cited by NovaRest Consulting, ``New York State 
Mandated Health Insurance Benefits,'' May 2003.
---------------------------------------------------------------------------
    Small businesses also suffer from greater variability in 
claims costs. In a firm with very few employees, a sick 
employee will have a greater impact on health care premiums, 
and these rising premiums sometimes price these firms out of 
insurance altogether. By contrast, in a firm with a large 
number of employees, a sick employee will not have a great 
impact on premiums and will not cause premiums to rise 
significantly.
    In July of 2002, the Subcommittee on Employer-Employee 
Relations held a hearing on the problem of the uninsured. At 
the hearing, Joe Rossmann, Vice President of Fringe Benefits, 
Associated Builders and Contractors (ABC), testified as to the 
increases in costs that ABC's member companies, most of which 
are smaller employers, were experiencing:

          For example, in Houston, Texas, Acoustical Concepts, 
        Inc. was forced to accept a premium increase of 47% 
        this year, even though they had no significant claims. 
        Moreover, their insurance company, Blue Cross/Blue 
        Shield, has informed them that in 1-2 years, the 87 
        employees at this company will be offered only 
        catastrophic coverage.\16\
---------------------------------------------------------------------------
    \16\ Hearing on ``Expanding Access to Quality Health Care: 
Solutions for Uninsured Americans'' Subcommittee on Employer-Employee 
Relations, Committee on Education and the Workforce, U.S. House of 
Representatives, 107th Congress, Second Session, July 9, 2002.

    Mr. Rossmann went on to say that, ``Indeed, massive premium 
increases of 40 percent, 50 percent and higher, and/or benefit 
reductions, are typical of what small businesses throughout the 
nation are experiencing today.'' \17\
---------------------------------------------------------------------------
    \17\ Id.
---------------------------------------------------------------------------
    At a later hearing on the Small Business Health Fairness 
Act, Phyllis Burlage, President, Burlage Associates, shared her 
experience:

          My rate hike this year is 45% with our health 
        maintenance organization (HMO). This is real money 
        since I absorb all the cost increases for my employees. 
        Since 1996, my company has experienced a 226% increase 
        in premiums--how can any business survive with these 
        types of increases over just a few years? \18\
---------------------------------------------------------------------------
    \18\ Hearing on ``H.R. 660, the Small Business Health Fairness Act, 
Subcommittee on Employer-Employee Relations,'' Committee on Education 
and the Workforce, U.S. House of Representatives, 108th Congress, First 
Session, March 13, 2003.

    There is ample evidence to indicate that small employers 
face greater challenges than larger employers or unions in 
providing health coverage, thus putting workers in small 
businesses at a greater risk of being uninsured.

High costs for small employers means workers in small businesses are 
        uninsured

    The increase in costs for small employers means that 
workers in small businesses are not offered health care 
insurance or are at risk of losing their health insurance. 
According to figures released by the U.S. Census Bureau in 
August 2004, the number of Americans who have no health 
insurance had increased to more than 45 million by 2003. 
Declining coverage in the employer based market accounts for 
the increase in the uninsured. Significantly, the reduction in 
employer-sponsored coverage comes almost totally from a 
decrease in the number of individuals covered by small 
employers.\19\
---------------------------------------------------------------------------
    \19\ U.S. Census Bureau, ``Income, Poverty, and Health Insurance 
Coverage in the United States: 2003,'' August 2004.
---------------------------------------------------------------------------
    Over 50 percent of the 45 million uninsured Americans 
either work in a small business or are a dependent of a small 
business worker.\20\ The cost of insurance is the most 
significant barrier to insurance coverage for workers and their 
families.\21\
---------------------------------------------------------------------------
    \20\ Department of Labor estimates of working families' health 
insurance status, based on the Census Bureau's annual March Current 
Population Survey.
    \21\ Testimony of Harry M.J. Kraemer, Jr., Chairman and CEO, Baxter 
International, Inc., on behalf of the Healthcare Leadership Council, at 
Subcommittee on Employer-Employee Relations Hearing on ``Expanding 
Access to Quality Health Care: Solutions for Uninsured Americans,'' 
Committee on Education and the Workforce, U.S. House of 
Representatives, 107th Congress, Second Session, July 9, 2002 (Serial 
No. 107-69).
---------------------------------------------------------------------------
    Indeed, the cost of health coverage is the most important 
factor employers cite in their decision whether to offer health 
care to their employees and their families. A 1997 survey by 
the Henry J. Kaiser Family Foundation indicated that small 
firms are extremely price sensitive. This survey found that 
even a 5 percent decrease in price would result in a 10 to 15 
percent increase in the likelihood of a small firm purchasing a 
plan.
    Hearing testimony from Ann L. Combs, Assistant Secretary of 
the Employee Benefits Security Administration, U.S. Department 
of Labor, explained some of the barriers to coverage that small 
firms face:

          Cost is clearly the biggest barrier for small 
        employers that want to provide health insurance. For a 
        variety of reasons, insurers typically charge small 
        firms more per employee than large firms for comparable 
        coverage. Small company premiums are 20 percent to 30 
        percent higher than those of large self-insured 
        companies with similar claims per covered employee. 
        Cost drivers include small businesses administrative 
        overhead, insurance company marketing and underwriting 
        expenses, adverse selection, and state regulatory 
        burdens. Small firms are likely to offer less generous 
        benefits and more of their premiums are consumed by 
        administrative costs.\22\
---------------------------------------------------------------------------
    \22\ Hearing on ``H.R. 660, the Small Business Health Fairness 
Act,'' Subcommittee on Employer-Employee Relations, Committee on 
Education and the Workforce, U.S. House of Representatives, 108th 
Congress, First Session, March 13, 2003 (Serial No. 108-10).

    Though the primary barrier to health coverage for small 
businesses is cost, other factors also deter small firms from 
offering coverage. Testimony from Harry M.J. Kraemer, Jr., 
Chairman and CEO, Baxter International, Inc., on behalf of the 
Healthcare Leadership Council, provided additional reasons that 
---------------------------------------------------------------------------
small firms are less likely to offer health care coverage:

          In an April 2002 survey by the Kaiser Family 
        Foundation, over one third of small businesses not 
        offering coverage said that administrative hassle was a 
        very important reason * * * A 2000 focus group of the 
        California Health Care Foundation found that a lack of 
        unbiased, easily understood information on health 
        insurance was a major barrier in acquiring coverage. 
        Many small business owners do not fully understand the 
        health insurance market and are skeptical of 
        information from insurance companies, the focus group 
        report stated. This lack of credible information could 
        be leading to inaction on the part of employers * * * 
        An EBRI [Employee Benefit Research Institute] 2000 
        Small Employer Health Benefits Survey found that many 
        small employers make decisions about whether to offer 
        health benefits to their workers without being fully 
        aware of the tax advantages that can make this benefit 
        more affordable. This survey found that 57 percent of 
        small employers do not know that health insurance 
        premiums are 100 percent tax deductible.\23\
---------------------------------------------------------------------------
    \23\ Subcommittee on Employer-Employee Relations Hearing on 
``Expanding Access to Quality Health Care: Solutions for Uninsured 
Americans'' Committee on Education and the Workforce, U.S. House of 
Representatives, 107th Congress, Second Session, July 9, 2002 (Serial 
No. 107-69).

    These factors, administrative costs, necessity of 
information about health insurance, and tax structure, are 
easily borne by larger employers. Taken together, however, they 
add to the difficulties that small employers face in offering 
health care coverage to their employees.

Solutions for our Nation's uninsured--the Small Business Health 
        Fairness Act, H.R. 525

    It is the strong belief of the Committee that solutions to 
the growing problem of the uninsured, particularly in small 
businesses, can only be found by utilizing the strengths of the 
employer-based health care system. Harry Kraemer's testimony 
puts it this way:

          In all of our research, the single most important 
        point that cannot be ignored is that the uninsured 
        issue is a workplace issue, with millions of wage-
        earning households representing the lion's share of the 
        uninsured population. It then stands to reason that our 
        most effective solutions must be found within the 
        existing private employer-based health care system.\24\
---------------------------------------------------------------------------
    \24\ Id.

    The Committee believes that if smaller employers were able 
to band together to become larger purchasers of health 
insurance, that this would give small businesses greater 
economies of scale, allowing them to bargain for health 
insurance with the clout of much larger businesses. In 
addition, if small businesses were able to self-fund their 
health plans, they would be relieved from the regulatory burden 
of state mandated benefit laws. The Committee believes that 
these two factors would combine to significantly lower the 
costs of health insurance, making it possible for very small 
firms to offer insurance.
    The Small Business Health Fairness Act would allow small 
businesses to join together under the umbrella of bona fide 
trade associations to become larger purchasers of health 
insurance. In addition, AHPs make it possible for small 
employers to self-insure, thereby avoiding costly state benefit 
mandates. The Committee expects that this will lower costs for 
small employers by 15-30 percent, making it possible for small 
firms to offer health insurance to workers and their families, 
many of whom are uninsured. Because of this, the Committee 
expects that AHPs will reduce the number of the uninsured by 
millions.
    It is the strong belief of the Committee that Congress can 
not afford to wait any longer to provide access to health care 
to our nation's uninsured, particularly those employed by small 
businesses.

Benefits of association health plans

    The preemption of state mandates is an integral aspect of 
ERISA. Because most small employers do not have the resources 
to take on the risk of self-insurance, they have been 
foreclosed from ERISA's federal preemption, and are held 
captive instead to the states' regulation of fully insured 
health products. Thus, small employers are not on a level 
playing field with large employers and unions.
    Representative Bill Archer (R-TX) predicted this dynamic at 
ERISA's passage:

          I think it is interesting to note that here we are 
        trying to permit small employers to compete with big 
        business, and that this * * * will have just the 
        reverse effect; the large corporations and the unions 
        have been basically excepted by this bill. But the 
        small employer * * * will no longer be able to compete, 
        in many instances, with the big corporations.\25\
---------------------------------------------------------------------------
    \25\ Debate on H.R. 2, the Welfare and Pension Plans Disclosure 
Act, U.S. House of Representatives, February 27, 1974.

    AHPs will solve many of these problems for small employers. 
Testimony from Ann L. Combs, Assistant Secretary for the 
Employee Benefits Security Administration, U.S. Department of 
Labor, at a March 2003 Subcommittee on Employer-Employee 
Relations hearing on H.R. 660, discussed the benefits of AHPs 
---------------------------------------------------------------------------
for small businesses:

          In an AHP, the current market and financial barriers 
        that face small businesses would be reduced or 
        eliminated. Small businesses would enjoy greater 
        bargaining power, economies of scale, administrative 
        efficiencies, and the benefits of a uniform regulatory 
        structure, giving them more access to affordable 
        coverage.\26\
---------------------------------------------------------------------------
    \26\ Hearing on ``H.R. 660, the Small Business Health Fairness 
Act,'' Subcommittee on Employer-Employee Relations, Committee on 
Education and the Workforce, U.S. House of Representatives, 108th 
Congress, First Session, March 13, 2003 (Serial No. 107-51).

    Joe Rossmann, Vice President of Fringe Benefits, Associated 
Builders and Contractors (ABC), described the experience of the 
association health plan offered by ABC before it was forced to 
discontinue its health coverage due to overlapping, 
---------------------------------------------------------------------------
inconsistent and incompatible state laws:

          We estimate that AHPs * * * can reduce the cost of 
        health benefits by 15-30 percent for small business 
        workers. We know this because association plans have 
        already proven they can deliver savings compared with 
        the cost of small employers purchasing directly from an 
        insurance company. For example, the AHP sponsored by 
        ABC for more than 40 years, which operated nationally, 
        had total administrative expenses of 13\1/2\ cents 
        (13.5 percent) for every dollar of premium. These costs 
        included all marketing, administration, insurance 
        company risk, claim payment expenses and state premium 
        taxes. Alternatively, small employers who purchase 
        coverage directly from an insurance company can 
        experience total expenses of 25 to 35 cents (25-35 
        percent) for every dollar of premium.\27\
---------------------------------------------------------------------------
    \27\ Subcommittee on Employer-Employee Relations Hearing on 
``Expanding Access to Quality Health Care: Solutions for Uninsured 
Americans'' Committee on Education and the Workforce, U.S. House of 
Representatives, 107th Congress, Second Session, July 9, 2002 (Serial 
No. 107-69).

    By utilizing the time-tested feature of federal preemption 
contained in ERISA, AHPs build upon the successes produced by 
private sector innovation and market competition. Rather than 
creating a new federal law, H.R. 525 builds on the current 
successful ERISA framework upon which plan sponsors have relied 
for almost thirty years. The enactment of AHP legislation would 
put the nation well on its way to closing the gap in health 
insurance coverage by offering millions of uninsured workers, 
their spouses and their children, the opportunity to access 
more affordable health coverage.
    Unfortunately, the smallest employers have not shared in 
the advantages of ERISA. AHPs build on ERISA to give smaller 
employers the same economies of scale and freedom to offer 
affordable coverage that larger employers and unions enjoy. In 
short, the bill clears the way for market forces to bring small 
employers costs down.

Why current ERISA law needs changes to clarify the status of 
        association health plans under federal and state law

    Allowing small employers to join together to form multiple 
employer plans is the most efficient means to deliver 
affordable health coverage to employees, particularly for 
smaller employers and employees who work in industries with 
high job mobility or above-average insurance risk. However, 
current law has not achieved the twin goals of preserving self-
insurance as an option for multiple employer plans of 
legitimate business and industry associations while keeping 
``bogus unions'' and fraudulent insurance schemes from using 
ERISA's federal preemption clause as a shield against state 
regulation of their abusive health insurance practices.
    Under ERISA, a multiple employer welfare arrangement (MEWA) 
is defined as a plan or other ``non-plan'' arrangement 
established to offer or provide ERISA welfare benefits (e.g., 
health benefits) to the employees of two or more employers.\28\ 
Under current law, the breadth of this definition should be 
read to sweep in the following types of entities: (1) large 
employer plans that include employees of entities outside the 
``control group'' of the employer; (2) ``church plans'' and 
governmental plans currently exempt from ERISA; (3) multiple 
employer entities, such as those maintained by legitimate 
trade, industry and professional associations, which meet the 
definition under ERISA of an ``employee benefit plan''; and (4) 
other multiple employer welfare arrangements which do not meet 
the definition under ERISA of an ``employee benefit plan.'' 
\29\
---------------------------------------------------------------------------
    \28\ The statute expressly excludes from the MEWA definition plans 
or other arrangements which are established or maintained--(i) under or 
pursuant to one or more agreements which the Secretary (of Labor) finds 
to be collective bargaining agreements, (ii) by a rural electric 
cooperative, or (iii) by a rural telephone cooperative association. The 
Department issued a regulation establishing standards and procedures 
for determinations as to whether a plan or other arrangement would be 
treated as established or maintained under or pursuant to one or more 
collective bargaining agreements for purposes of the above noted 
exception under ERISA section 3(40)(A)(i). See 20 CFR 2510.3-40.
    \29\ 29 U.S.C. Sec. 1003(40).
---------------------------------------------------------------------------
    In general, ERISA's federal preemption provisions allow 
states to regulate insurance products that employee benefit 
plans purchase, but preclude states from applying state 
insurance law directly to ERISA-covered employee benefit 
plans.\30\ As originally enacted, this broad preemption 
included self-insured multiple employer which met ERISA's 
definition of ``employee benefit plan.''
---------------------------------------------------------------------------
    \30\ This concept is incorporated in ERISA section 514 as the so-
called ``deemer clause'' prohibiting states from deeming ERISA plans to 
be an insurance company or engaged in the business of insurance for 
purposes of any state law purporting to regulate insurance. 29 U.S.C. 
Sec. 1144(b)(2)(B).
---------------------------------------------------------------------------
    Unfortunately, illegitimate schemes (which did not rise to 
the level of ERISA ``employee benefit plans'') promoted by 
``bogus unions'' and others (known as MEWAs) were able to delay 
and thwart legitimate state enforcement efforts by claiming 
ERISA preemption. To remedy this, ERISA was amended in 1983 in 
an attempt to clarify the ability of states to regulate the 
non-ERISA-plan entities as well as legitimate self-insured 
ERISA multiple employer plans (but the regulation by the states 
of the latter was conditional, i.e., regulation is permitted 
only ``to the extent not inconsistent with the provisions'' * * 
* of ERISA Title I).\31\ This later clause was intended to 
facilitate state regulation of all self-insured benefit 
arrangements by allowing responsible state regulation of self-
insured multiple employer ERISA plans. It was not expected that 
states would use this authority to terminate legitimate self-
insured plans solely because they were not licensed under state 
laws designed to regulate commercial insurance companies.
---------------------------------------------------------------------------
    \31\ 29 U.S.C. Sec. 1144.
---------------------------------------------------------------------------
    Unfortunately, the 1983 amendment to ERISA did not achieve 
its two primary objectives. While a few states have enacted 
specific statutes regulating legitimate self-insured multiple 
employer plans, others have outlawed all self-insured multiple 
employer benefit arrangements, even legitimate self-insured 
ERISA plans. Some state actions have been selective in nature 
and have not followed any consistent basis either within a 
state or among states. Neither did the 1983 amendment achieve 
the objective of stemming the number of illegitimate 
enterprises that continue to bilk the public under arrangements 
that are not legitimate ERISA ``employee benefit plans.''
    H.R. 525 will meet these dual objectives by enabling 
legitimate associations to maintain or establish multiple 
employer plans by voluntarily seeking licensure in the few 
states permitting them to do so or by seeking federal 
certification as an AHP. Entities that do not have either a 
state or federal certification will be fully subject to state 
law. Therefore the states, as they choose, may force such 
entities to meet any insurance or multiple employer plan 
licensing requirements or shut them down. Under the bill, all 
such entities must register with the Department of Labor (DOL) 
and the states and are subject to the criminal penalties under 
ERISA for failure to do so (illegitimate entities will become 
criminal enterprises). In addition, DOL is given ``cease and 
desist'' authority to curtail the activities of any such 
illegitimate entities. These changes are necessary to clarify 
ERISA preemption and the role of the states and the federal 
government in relation to MEWAs.
    The clarification of ERISA preemption relating to MEWAs 
will free substantial federal resources that have been spent to 
stop health insurance fraud and abuse. Moreover, the 
considerable state resources involved in stopping MEWA fraud 
will be released for more productive purposes. Additional 
resources of the federal government can also be redirected more 
productively in administering the new law and helping expand 
more affordable health coverage.
    As described in more detail below, the bill requires self-
insured AHPs to meet solvency, fiduciary, and other necessary 
standards. The fact is that, under the bill, legitimate 
association self-insured arrangements will be subject to 
greater solvency regulation than union-sponsored multiemployer 
plans and the self-insured single-employer plans of even the 
largest employers.

Conclusion

    H.R. 525 will open up the health insurance market to the 
millions of American workers and their families who today do 
not have access to or cannot afford private health insurance. 
It does so by removing the structural barriers that prevent 
some employers from voluntarily providing health insurance to 
their employees, either on their own or as part of an 
association health plan.
    H.R. 525 amends Title I of ERISA to provide a 21st century 
model of freedom for employees and employers to negotiate 
benefits, letting market forces help reduce health care costs, 
thus making health insurance coverage more available and 
affordable for the American worker.
    Cost-conscious small employers must be given the same 
opportunity to achieve the economies of scale and freedom from 
excessive government regulation that large employers and unions 
already enjoy. Removing barriers and allowing small employers 
to pool together to voluntarily form ERISA multiple employer 
health plans can effectively address the problems of uninsured 
workers and their families. AHPs build on what is already 
working in the employer-based health care system; and the 
increased health plan competition that results will mean 
improved access to more affordable coverage for millions of 
employees, particularly those uninsured individuals and their 
families who work for small businesses.
    In conclusion, the only way major strides in expanding 
access to health coverage for the uninsured can be achieved in 
a voluntary market is to make reforms that bring down the cost 
of providing health coverage to employers, particularly small 
employers. Health care reform that is effective in expanding 
access and based on free market principles is possible. It is 
in the grasp of this Congress in the form of AHPs. It is the 
strong belief of the Committee that H.R. 525 presents this 
Congress with perhaps its best opportunity since the passage of 
ERISA to expand access to affordable health insurance for the 
many American families who are currently uninsured.

                             B. LEGISLATION

    Providing access to affordable health care coverage for 
American workers and their families has been the subject of 
considerable Committee attention during the current and past 
Congresses. H.R. 525, the Small Business Health Fairness Act, 
will do just that.

H.R. 525's rules governing establishment of association health plans

    H.R. 525 amends Subtitle B of Title I of ERISA to add a new 
Part 8 that sets forth rules governing the establishment of 
AHPs. AHPs are defined as group health plans whose sponsors are 
bona fide trade, industry or professional associations or bona 
fide chambers of commerce. These organizations must be 
structured and maintained in good faith for a continuous period 
of not less than three years with purposes other than that of 
obtaining or providing medical care. AHPs must be established 
as permanent entities, receiving the active support of members 
and requiring for membership payment on a periodic basis of 
dues or payments necessary to maintain eligibility for 
membership in the sponsor. These bona fide organizations must 
not condition membership, dues or payments, or coverage under 
the association health plan on the basis of health-status 
related factors. In addition to the associations described 
above, franchise networks would be eligible to seek 
certification as AHPs.
    Opponents of H.R. 525 have charged that the bill will 
result in a segmented small group market, i.e. that 
associations will form AHPs in order to select or ``cherry 
pick'' healthy individuals away from state small group markets. 
Indeed, under current law, sham ``unions'' and other fraudulent 
insurance organizations have claimed ERISA preemption in order 
to evade state regulation. Not all states have statutes dealing 
with MEWAs and many states suffer from insufficient resources 
and ineffective enforcement of regulations, leaving these 
fraudulent insurance schemes unchallenged.
    The Committee intends the bill's requirements that only 
allow bona fide trade and professional associations, such as 
the National Federation of Independent Business and the 
National Restaurant Association, to offer AHPs to protect 
against ``cherry picking,'' or selection of lower risk 
individuals into AHPs. This ensures that AHPs will not be 
formed in order to select healthy individuals; rather, 
associations must have a larger purpose in order to form or 
establish an AHP. Additional protections against ``cherry 
picking'' will be discussed later.

H.R. 525's procedures and conditions for certification for AHPs

    H.R. 525 establishes procedures for the certification of 
AHPs. In the case of a self-insured AHP, the Department of 
Labor shall grant certification only if all of the requirements 
of the newly established Part 8 are met, or will be met upon 
the date on which the plan is to commence operations. Self-
insured association health plans must have at least 1,000 
participants and beneficiaries and may only be certified if 
they are one of the following:
          (1) A plan that offered such coverage on the date of 
        enactment of H.R. 525;
          (2) A plan where the sponsor does not restrict 
        membership to one or more trades or businesses or 
        industries and whose eligible participating employers 
        represent a broad cross-section of trades or businesses 
        or industries; or
          (3) A plan whose eligible participating employers 
        represent one or more trades, businesses, or industries 
        specified in the bill; or which have been indicated as 
        having average or above-average health insurance risk 
        or health claims experience by reason of state rate 
        filings, denials of coverage, or proposed premium rate 
        levels, or other means demonstrated by such plan in 
        accord with regulations prescribed by DOL.
      In addition to the requirement that only bona fide trade 
and industry associations may offer AHPs, the Committee 
believes that these requirements, allowing only multi-industry 
associations or trade associations with average risk to self-
insure, offer further protection against ``cherry picking.''
    In the case of AHPs that offer fully insured health 
products, the Secretary of Labor shall establish a class 
certification procedure. Because of the states role in 
regulating insurance, the Committee envisions the class 
certification process to involve the appropriate state 
regulatory authorities. For example, as state insurance 
commissioners will continue to govern the solvency of fully 
insured health insurance products offered by AHPs, the 
Committee intends the Department of Labor to consult with state 
insurance commissioners to ensure that issuers offering 
products to AHPs meet appropriate solvency standards. The 
Committee expects that this consultation would be maintained on 
an ongoing basis to ensure that certified AHPs offering fully 
insured health products continue to meet appropriate state 
standards.
    All AHPs must be operated, pursuant to a trust agreement, 
by a board of trustees which has fiscal control and which is 
responsible for all operations of the plan. The board of 
trustees must develop rules of operation and financial control 
based on a three-year plan of operation, which is adequate to 
carry out the terms of the plan and to meet all applicable 
requirements of Title I of ERISA. The board of trustees must 
consist of individuals who are owners, officers, directors, or 
employees of the employers who participate in the plan. 
Instruments governing the AHP must provide that the board of 
trustees serves as the named fiduciary and plan administrator, 
that the sponsor serves as plan sponsor, and that certain 
reserve requirements are met.
    AHPs must meet all of ERISA's fiduciary rules requiring 
that the assets of an employee benefit plan be held in trust 
for the exclusive benefit of plan participants and their 
beneficiaries, and for defraying reasonable expenses of 
administering the plan. Part 4 of Title I of ERISA explains the 
fundamental duties of fiduciaries to employee benefit plans. In 
short, fiduciaries are to act solely in the interest of 
participants and beneficiaries with care, skill, prudence and 
diligence.\32\ The Committee believes that the fiduciary duty 
of loyalty--the highest duty of loyalty that exists in the 
law--is the ultimate protection to participants and 
beneficiaries in ERISA plans.\33\ Accordingly, the Committee 
believes that the employers and employees who participate in 
AHPs will be well-protected.
---------------------------------------------------------------------------
    \32\ 29 U.S.C. Sec. 1104.
    \33\ See, e.g., Donovan v. Bierwith, 680 F.2d 263, 272n.8 (2d Cir. 
1982).
---------------------------------------------------------------------------
    Additional certification criteria include the filing of a 
complete application; a filing fee of $5,000; financial, 
actuarial, reporting, and participation requirements; and such 
other requirements as may be specified by the Secretary of 
Labor as a condition of the certification. In addition, the 
application must include the following: (1) identifying 
information about the arrangement and the states in which it 
will operate; (2) evidence that ERISA's bonding requirements 
will be met; (3) copies of all plan documents and agreements 
with service providers; (4) a funding report indicating that 
the reserve requirements will be met, that contribution rates 
will be adequate to cover obligations, and that a qualified 
actuary who is a member in good standing of the American 
Academy of Actuaries has issued an opinion with respect to the 
arrangement's assets, liabilities, and projected costs; and (5) 
any other information prescribed by the Secretary. Certified 
AHPs must notify the applicable authority of any material 
changes in this information at any time, must file annual 
reports with the Secretary, and must engage a qualified 
actuary. AHPs are also required to file their certification 
with the applicable state authority of each state in which at 
least 25 percent of the participants and beneficiaries under 
the plan are located.

Protection against discrimination

    H.R. 525 prohibits discrimination against eligible 
employers and employees by requiring that all employers who are 
association members must be eligible to participate under the 
terms of the plan and must be informed of all benefit options 
available. In addition, H.R. 525 requires that eligible 
individuals may not be excluded from enrolling in the plan 
because of health status.
    Despite these protections, opponents of H.R. 525 have 
criticized it as allowing anti-selection with respect to the 
small group market. The Committee notes that requiring all 
employers who are members of the bona fide association to be 
eligible for the AHP is equal to or greater than any state law 
governing insurers.
    In addition, employers participating in the AHP are 
forbidden from selectively providing sick individuals with 
coverage in the individual health insurance market. The 
Committee intends this prohibition to be an additional 
protection against ``cherry picking'' by ensuring that AHPs may 
not in effect select against sick individuals by allowing their 
employers to provide coverage to these workers outside of the 
AHP. H.R. 525 allows AHPs to include minimum participation, 
contribution, and size requirements to the extent that they 
meet the nondiscrimination and other rules under sections 701, 
702, and 703 of ERISA.\34\
---------------------------------------------------------------------------
    \34\ 29 U.S.C. Sec. Sec. 1171, 1172, 1173.
---------------------------------------------------------------------------
    AHPs are specifically prohibited from denying or 
conditioning health insurance for individuals on the basis of 
health status. Specifically, the bill requires AHPs to follow 
the same rules on portability, pre-existing conditions, 
nondiscrimination and renewability that large employers and 
insurance companies must follow under the 1996 Health Insurance 
Portability, Accessibility and Accountability Act (HIPAA).
    In addition to H.R. 525's protections for individuals, the 
bill also requires that the contribution rates for any 
particular employer must be nondiscriminatory. This means that 
contribution rates for employers cannot vary on the basis of 
any health status-related factor with respect to employees of 
particular employers or the type of business or industry in 
which the employer is engaged, unless the state where that 
small employer is located would specifically allow such a 
variation, and then, only to the extent that the state would 
allow.
    During consideration of the bill, the Committee rejected an 
amendment that would have prohibited AHPs from varying rates 
for small employers even if the state law allowed such a 
variance. The Committee has included many protections in the 
bill in order to prevent the practice of ``cherry picking'' by 
AHPs. The Committee believes that it is important to note that 
if H.R. 525 did not allow AHPs to vary contribution rates for 
small employers in a state to the extent that the state law 
would allow, it would be likely that health insurance issuers 
would ``cherry pick'' the healthier small employer groups out 
of the AHP.
    Some opponents of the bill believe that AHPs should be 
required to ``community rate'' or average the claims of all 
participating employers in the AHP and charge each an 
equivalent contribution rate. They assert that group pooling is 
all that is needed to lower health insurance costs and thus 
avoid the ``cherry picking'' of healthier groups by health 
insurance issuers.
    Though the Committee believes that pooling of risk will 
indeed lower costs in some cases, it would not be enough to 
prevent the ``cherry picking'' of healthy groups by health 
insurance issuers. For example, the state of Illinois allows 
issuers to vary rates for small employers on the basis of 
medical information. Thus, an issuer might attempt to draw 
healthier groups away from the AHP by offering a rate that 
could be 67 percent lower than a sick group. While economies of 
scale will lower the health insurance costs of the employers 
participating in an AHP, it is unlikely that they will be 
lowered by 67 percent. Thus in the Illinois case, it is obvious 
that the AHP would need to have the same flexibility as other 
state regulated products to attract the participation of a 
broad cross section of its membership versus only the unhealthy 
groups.
    The Committee notes that almost every state allows rates 
for small employers to vary by some factors, such as age, 
gender or geography. Only two states, New York and Vermont, 
have gone so far as to require strict ``community rating'' in 
the small group market. Allowing issuers to vary rates while 
requiring community rating for AHPs would virtually ensure that 
issuers have an advantage over AHPs in the marketplace, thereby 
resulting in adverse selection against AHPs.
    Another argument that has been used to support the 
contention that H.R. 525 will allow ``cherry-picking'' is the 
assertion that state insurance rating rules will not apply to 
fully insured health products offered by AHPs. It is the view 
of the Committee that in the case of AHPs that offer fully 
insured health coverage, H.R. 525 would not generally preempt 
state laws that govern the rating of insurance products offered 
by associations except in the cases discussed below.
    The Committee intends H.R. 525 to preempt state insurance 
rating laws for fully insured plans to the extent that they 
would prohibit AHPs from setting premiums on the basis of the 
claims of the AHP plan. For example, some state laws require 
that claims for all small employers in the state (those in and 
out of the AHP) be averaged to determine a general average for 
premium setting purposes. In those states, these laws would be 
preempted. Importantly, should a state attempt to regulate 
federally certified AHPs more strictly with regard to allowable 
rating practices than other non-AHP associations offering 
coverage in a state, H.R. 525 would preempt these laws as well.
    In contrast to the situation for AHPs that offer fully 
insured health products, self-insured AHPs, like self-insured 
union and employer plans, will not be subject to state rating 
laws because they are not in the business of insurance. ERISA 
sets no federal requirements for self-insured plans--it does 
not require that large employers or unions ``community rate'' 
their plans. These plans can and do vary their rates for 
employees, particularly on geography. Nothing in federal law 
prohibits a union or large employer from varying rates for a 
group of their similarly situated individuals. For example, a 
different collective bargaining unit, a different employer in a 
multi-employer plan, or a set of employees located in a 
different geographic location could have different rates. It is 
the intention of the Committee that self-insured AHPs be 
allowed to vary rates on geography, age, family composition, 
gender or other criteria, as is the case for other self-insured 
plans.
    Finally, the Committee intends that since the AHP bill is 
an amendment to ERISA, it does not change the relationship 
between ERISA and Title VII of the Civil Rights Act. Because of 
this, protections for individuals under the Title VII of the 
Civil Rights Act will be the same for workers participating in 
AHPs as for those workers who receive health coverage under 
ERISA plans today.

Preemption of state mandates

    H.R. 525 allows AHPs to exercise sole discretion in 
selecting specific items and services to be covered under the 
plan. This is true for AHPs that offer fully insured health 
products as well as AHPs that self-insure. As such, the bill 
preempts any state law that would specify items or services to 
be covered under the plan.
    Clearly, AHPs that self-insure would be exempt from state 
laws that require specific items or services as they are not in 
the business of insurance. However, preemption is also granted 
in the case of fully insured health products. As the bill 
specifically requires that a self-insured AHP have at least 
1000 participants, in order for smaller associations to take 
advantage of the preemption from benefit mandates, they must 
also be preempted on the fully insured side. However, the bill 
does not preempt state laws that require health plans to cover 
individuals with specific diseases, such as diabetes or AIDS, 
in the state where the AHP is domiciled.
    During consideration of the bill, the Committee rejected 
numerous amendments that would have allowed general preemption 
of state benefit mandates with specific exceptions. The 
Committee feels strongly that many individuals who receive 
coverage through AHPs would otherwise have had no health care 
coverage, and that coverage offered by AHPs will be high 
quality, covering most if not all of the benefits that are 
typically mandated by the states.
    Because of this, the Committee confidently rejected the 
need to micromanage the provision of health care by AHPs, 
instead giving AHPs the freedom that large employers and unions 
already enjoy, to select the benefit packages that best serve 
their employees. The Committee also notes that for many 
workers, passage of AHPs will mean the difference between 
access to coverage and no health care coverage at all. Though 
state laws may guarantee particular benefits when coverage is 
offered, in general, state laws do not require that health 
coverage be offered. Therefore for those many individuals who 
are not offered health insurance by their employer, the 
coverage their employer is able to access through the AHP, with 
or without particular state mandates, will provide health 
benefits the individual would not otherwise have.
    Opponents of the bill have suggested that the bill's 
preemption from state benefit mandates also preempts laws such 
as those that regulate solvency, external review and prompt 
payment of claims. This is not the case. The Committee intends 
that, under the bill, state laws such as those that govern 
external review and prompt payment of claims will apply to AHPs 
that offer fully insured health coverage and Assistant 
Secretary Ann Combs clarified this issue during a Subcommittee 
hearing on the bill in the 108th Congress.\35\ Since these laws 
do not impact the selection of specific items or services 
consisting of medical care, these laws are not preempted. 
Though the Committee believes that the bill does not preempt 
these laws, it has seen fit to include two provisions to 
clarify the application of these laws. First, H.R. 525 includes 
language that amends section 514 of ERISA to clarify that the 
preceding amendments should not be construed to supersede or 
impair the law of any state with respect to issuers or health 
insurance coverage that provides solvency standards. H.R. 525 
also includes language clarifying that laws relating to prompt 
payment of claims were also not superseded.
---------------------------------------------------------------------------
    \35\ Subcommittee on Employer-Employee Relations hearing on H.R. 
660, ``Small Business Health Fairness Act'' Committee on Education and 
the Workforce, U.S. House of Representatives, 108th Congress, First 
Session, March 13, 2003 (Serial No. 108-10).
---------------------------------------------------------------------------
    During consideration of the bill, the Committee also 
rejected amendments that would have subjected AHPs to federal 
mandates. The Committee believes that adding federal benefit 
mandates to ERISA is an issue separate and apart from 
legislation to create AHPs. Should Congress decide to establish 
additional federal patient protections, the Committee believes 
that they should be applied to all plans equally.

Solvency requirements

    Health insurance issuers that offer fully insured coverage 
to AHPs will continue to be subject to state laws regarding 
solvency as discussed above. In addition, the Committee expects 
that the Department of Labor would condition its class 
certification of fully insured AHPs on the issuer's 
satisfaction of state solvency and other insurance regulations.
    With respect to self-insured AHPs, H.R. 525 sets forth 
strict solvency requirements. Solvency provisions are as 
follows:
          AHPs are required to maintain: (1) reserves adequate 
        for unearned contributions from employers, (2) reserves 
        for liabilities incurred, (3) reserves for any other 
        obligations, and (4) reserves for a margin of error. 
        The amount of each of these reserve components must be 
        recommended by a qualified actuary, certified by the 
        American Academy of Actuaries;
          AHPs are required to maintain aggregate stop loss 
        insurance in the event that claims exceed the plan's 
        expectation by 25 percent, and specific stop loss 
        insurance as recommended by a qualified actuary. Both 
        of these insurance products will be fully regulated by 
        the state, and the Secretary of Labor is able to modify 
        or increase these requirements by regulation;
          AHPs are required to maintain indemnification 
        insurance in order to prevent unpaid claims in the 
        event of plan termination;
          The board of trustees of an AHP is required to 
        certify on a quarterly basis that the AHP is 
        financially sound. If the board determines that the 
        solvency requirements of the bill are not being met, 
        they must, in consultation with the qualified actuary, 
        develop a plan to ensure compliance and report such 
        information to the Secretary;
          AHPs are required to maintain a minimum surplus 
        reserve of $500,000. This amount may be increased to up 
        to $2 million by the Secretary of Labor;
          AHPs are also required to contribute $5000 per year 
        to a new Association Health Plan Fund, established to 
        assist in paying claims in the event of an AHP 
        termination. The Secretary may increase the required 
        contribution if this amount is inadequate; and
          The bill establishes a new Solvency Standards Working 
        Group. Members from the National Association of 
        Insurance Commissioners, the American Academy of 
        Actuaries, the state governments, and others will make 
        recommendations to the Secretary to assist in the 
        formation of solvency regulations.
    The Committee notes that these requirements are much 
stronger than current law for employers or unions who self-
insure, as ERISA contains no solvency standards for these 
entities. Further, the Committee notes that these standards are 
generally analogous to state solvency standards for health 
insurance issuers.
    H.R. 525 grants authority to the Secretary of Labor to make 
payments to stop loss or indemnification insurers in any case 
in which the Secretary determines that an AHP is failing or 
will fail to meet the federal solvency requirements or will 
terminate. H.R. 525 also requires that the issuers of stop loss 
and indemnification insurance for self-insured AHPs notify the 
Secretary of Labor if the AHP fails to make a payment that 
would result in the cancellation of the insurance policy. This 
provision is intended to ensure that the Secretary of Labor 
maintains insurance products if necessary, so that in the event 
of an AHP failure, the insured products meet plan losses and 
satisfy workers claims.
    The Committee also grants authority to the Secretary to 
permit an AHP to substitute, for all or part of the reserves 
required, such security, guarantee, hold-harmless arrangements, 
insurance, or other financial arrangement as the Secretary 
determines to be adequate to enable the plan to fully satisfy 
all benefit liabilities on a timely basis. Such an alternative 
must not be less protective than the basic provisions for which 
it is substituted. H.R. 525 requires a self-insured AHP to meet 
the reserve requirements even if its certification is no longer 
in effect.
    In any case where an AHP notifies the Secretary that it has 
failed to meet the reserve requirements and corrective action 
has not restored compliance, and the Secretary determines that 
there is a reasonable expectation that the plan will continue 
to fail to meet the applicable requirements, the Secretary may 
direct the board to terminate the arrangement.
    H.R 525 provides that an AHP may also voluntarily terminate 
only if the board of trustees provides 60 days advance written 
notice to participants and beneficiaries and submits to the 
Secretary a plan providing for timely payment of all benefit 
obligations.
    Whenever the Secretary determines an AHP will not be able 
to provide benefits, or is otherwise in financial distress, the 
Secretary shall apply to the appropriate United States District 
Court for appointment as trustee to administer the termination 
of the plan.

State assessment authority

    H.R. 525 specifically allows a state to assess a self-
insured AHP with a contribution tax to the same extent the 
state taxes health insurance plans that offer coverage to fully 
insured AHPs. Such tax must be computed by subtracting the 
amount of any tax or assessment otherwise imposed by the state 
on other insured products maintained by the self-insured AHP.

Amendments to ERISA's preemption rules

    H.R. 525 adds a new subsection 514(d) of ERISA (current 
subsection (d) is redesignated as (e)) to clarify the ability 
of health insurance issuers to offer health insurance coverage 
under AHPs. Should states attempt to preclude AHPs from 
operating by passing laws that preclude them from doing so or 
have this effect, these laws will be preempted under ERISA. For 
example, should a state law refuse to license health insurance 
issuers that intend to provide health coverage to an AHP, the 
Committee intends this law to be preempted by the bill. The 
Committee intends this language to serve as a warning to state 
regulators that their ability to regulate fully insured health 
products provided by AHPs stops at the point where they attempt 
to prevent AHPs from operating.
    H.R. 525 also makes two changes to ERISA's preemption laws 
regarding MEWAs. First, paragraph (6) of section 514(b) is made 
inapplicable with respect to any state law in the case of a 
certified AHP. This change ensures that AHPs will not be forced 
to comply with the same level of confusing and duplicative dual 
regulation that MEWAs have been subject to. Second, the bill 
removes the current restriction on state regulation of self-
insured multiple employer welfare arrangements providing 
medical care (which do not elect to meet the certification 
requirements for AHPs) under section 514(b)(6)(A)(ii) by 
eliminating the requirement that such state laws otherwise ``be 
consistent with the provisions of ERISA Title I.'' As discussed 
above, H.R. 525 provides that legitimate associations may 
choose to either remain subject to the few state multiple plan 
laws or to apply for a federal certification as an AHP. The 
legislation draws bright lines regarding state and federal 
authority regarding self-insured multiple employer plans. 
Current law is confusing regarding the responsibility of the 
states and the Department of Labor under ERISA. Under the bill, 
MEWAs have two choices, apply for and become a certified AHP, 
or be regulated entirely by the states.
    H.R. 525 includes two other important provisions: (1) It 
allows any health insurance issuer to offer the same type of 
health insurance coverage provided to an AHP to other eligible 
employers that may not be a member of the AHP; and (2) It 
clarifies that health insurance coverage policy forms filed and 
approved in a particular state in connection with an insurer's 
offering under an association health plan are deemed to be 
approved in any other state in which such coverage is offered 
when the insurer provides a complete filing in the same form 
and manner to the authority in the other state. The Committee 
intends the preemption amendment with regard to the filing of 
policy forms in other states to remedy the administrative 
burden of filing differing policy forms in different states, 
and to speed the process of approval, as once the policy form 
is approved in one state, it is deemed to be approved in every 
other state.
    Section 514 of ERISA is also amended to include a necessary 
cross-reference to the newly created section 805(b) (relating 
to the ability of AHPs and health insurance issuers to design 
association health insurance options) and to section 
805(a)(2)(B) (relating to the ability of AHPs and health 
insurance issuers to base contribution rates on the experience 
of such plans). The cross-references are necessary in order 
ensure the proper rules are established for AHPs. As discussed 
above, the bill also includes language regarding the solvency 
of fully insured health products or health insurance issuers 
and the prompt payment of claims by health insurers providing 
to an AHP.

Enforcement provisions relating to AHPs and MEWAs

    H.R. 525 amends ERISA to establish enforcement provisions 
relating to AHPs and MEWAs. Specifically, the bill would: (1) 
establish that willful misrepresentation that an entity is a 
certified AHP or collectively-bargained arrangement may result 
in criminal penalties; (2) allow for cease activity orders for 
arrangements found to be neither licensed, registered, or 
otherwise approved under state insurance law, or operating in 
accordance with the terms of the certification granted by the 
Secretary under Part 8; and (3) require the named fiduciary or 
board of trustees of an AHP to comply with the required claims 
procedure under ERISA.

Cooperation between federal and state authorities

    H.R. 525 amends section 506 of ERISA (relating to 
coordination and responsibility of agencies enforcing ERISA and 
related laws) to require the Secretary of Labor to consult with 
state insurance departments with regard to the Secretary's 
authority under section 502 and 504 to enforce provisions 
applicable to certified AHPs. In the case of AHPs offering 
fully insured health coverage, the Secretary shall consult with 
the state in which filing and approval of a policy type offered 
by the plan was initially obtained. In all other cases, the 
Secretary shall take into account the places of residence of 
the participants and beneficiaries under the plan and the state 
in which the trust is maintained in determining which state is 
the state with which consultation is required.

Effective date

    In general, the amendments made by H.R. 525 are effective 
one year after enactment of the Act. In addition, the Secretary 
is required to issue all regulations needed to carry out the 
amendments within one year after enactment of the Act and 
report to Congress within five years the effect of AHPs on 
reducing the number of uninsured workers.

                           Section-by-Section

    Section 1--Short title and table of contents.
    Section 2(a) creates a new Part 8 under ERISA (as described 
below).
    Section 801 outlines that a sponsor of an AHP must be a 
bona fide association established for substantial purposes 
other than that of obtaining or providing medical care. The 
association must charge dues to its small business members and 
must not condition membership, dues or coverage under the 
health plan on the basis of health status.
    Section 802 establishes a procedure for the certification 
of Association Health Plans as prescribed by the Secretary of 
Labor. For AHPs that purchase health insurance from an 
insurance company, the Secretary will establish a class 
certification. For those that will offer a self-insured health 
benefit, the bill establishes several criteria in order to 
insure that the businesses covered will be of average health 
risk, to avoid pulling only healthy individuals from the small 
employer market (``cherry-picking'').
    Section 803 establishes additional eligibility requirements 
for AHPs. Applicants must demonstrate that the arrangement's 
sponsor has been in existence for a continuous period of at 
least three years for substantial purposes other than providing 
coverage under a group health plan. AHPs must be operated, 
pursuant to a trust agreement, by a ``board of trustees'' which 
has complete fiscal control and which is responsible for all 
operations of the plan. The board of trustees must consist of 
individuals who are owners, officers, directors or employees of 
the employers who participate in the plan.
    Section 804 prohibits discrimination against eligible 
employers and employees by requiring that, (1) all employers 
who are association members be eligible for participation under 
the terms of the plan, (2) that eligible employers be informed 
of all benefit options available, and (3) that eligible 
individuals of such participating employers not be excluded 
from enrolling in the plan because of health status. The bill 
also stipulates that no participating employer may exclude an 
employee from enrollment under an AHP by purchasing an 
individual policy of health insurance coverage for such person 
based on his or her health status.
    Section 805 requires that contribution rates for any 
particular employer must be nondiscriminatory--they cannot vary 
on the health status of the particular employer or on the type 
of business or industry in which the employer is engaged, 
unless the state in which the employer is located would 
specifically allow such a variance, and then, only to the 
degree allowed in the state. In the case of AHPs offering fully 
insured health coverage, state rating laws that prevent an AHP 
from setting contribution rates based on the claims experience 
of the plan or that regulate a federally certified AHP more 
strictly than other associations offering fully insured 
coverage shall also be preempted. In addition, this section 
outlines that association health plans must be allowed to 
design benefit options. Specifically, the bill mandates that no 
provision of state law shall preclude an AHP or health 
insurance issuer from exercising its sole discretion in 
designing the items and services of medical care to be included 
as health insurance coverage under the plan.
    Section 806 establishes capital reserve requirements for 
self-insured AHPs and requires them to obtain stop loss and 
indemnification insurance. In addition, the AHP must maintain 
minimum surplus reserves of $500,000 or such greater amount (up 
to $2,000,000) as the Secretary of Labor may prescribe. Any 
person issuing stop loss or indemnification insurance to a plan 
is required to notify the Secretary of Labor of any failure of 
premium payment meriting cancellation of the policy. The bill 
also establishes an ``Association Health Plan Fund'' which is 
to be managed by the Department of Labor for the purpose of 
making payments to cover any outstanding benefit claims which 
are not fulfilled in accord with the solvency standards 
described above. All certified AHPs would be required to pay 
$5,000 into the fund annually. The bill also establishes a 
``Solvency Standards Working Group'' for the purpose of 
providing input to the Secretary with respect to solvency 
requirements for AHPs certified under the Act. The bill grants 
authority to the Secretary to permit an association health plan 
to substitute, for all or part of the reserves required, such 
security, guarantee, hold-harmless arrangements, insurance, or 
other financial arrangement as the Secretary determines to be 
adequate to enable the plan to fully satisfy all benefit 
liabilities on a timely basis. Such an alternative must not be 
less protective than the basic provisions for which it is 
substituted. If the Secretary determines that there will be a 
failure or termination of an AHP, the bill grants the Secretary 
authority to make payments to insurers in order to maintain the 
stop loss or indemnification insurance.
    Section 807 sets forth additional criteria which 
association health plans must meet to qualify for 
certification. The Secretary shall grant certification to a 
plan only if: (1) a complete application has been filed, 
accompanied by the filing fee of $5,000; and (2) all other 
terms of the certification are met (including financial, 
actuarial, reporting, participation, and such other 
requirements as may be specified as a condition of the 
certification). AHPs are also required to file their 
certification with the applicable state authority of each state 
in which at least 25% of the participants and beneficiaries 
under the plan are located.
    Section 808 requires that, except as provided in section 
809, an AHP may voluntarily terminate only if the board of 
trustees provides 60 days advance written notice to 
participants and beneficiaries and submits to the applicable 
authority a plan providing for timely payment of all benefit 
obligations.
    Section 809 requires that the board of trustees of a self-
insured AHP must determine quarterly whether the reserve 
requirements of section 806 are being met and, if they are not, 
must, in consultation with the qualified actuary, develop a 
plan to ensure compliance and report such information to the 
Secretary. In any case where an AHP notifies the Secretary that 
it has failed to meet the reserve requirements and corrective 
action has not restored compliance, and the Secretary 
determines that there is a reasonable expectation that the plan 
will continue to fail to meet the requirements applicable to 
the AHPs; the Secretary may direct the board to terminate the 
arrangement.
    Section 810 sets forth procedures whereby the Secretary may 
become the trustee of insolvent AHPs. Whenever the Secretary 
determines an AHP won't be able to provide benefits, or is 
otherwise in financial distress, the Secretary shall apply for 
appointment as trustee to administer the termination of the 
plan.
    Section 811 allows a state to assess newly certified AHPs 
with a contribution tax to the same extent they tax health 
insurance plans. Such tax must be computed by subtracting the 
amount of any tax or assessment otherwise imposed by the state 
on other insured products maintained by the self-insured AHP.
    Section 812 defines the following terms: group health plan, 
medical care, health insurance coverage, health insurance 
issuer, applicable authority, health status-related factor, 
individual market, treatment of very small groups, 
participating employer, applicable state authority, qualified 
actuary, affiliated member, large employer, and small employer.
    Section 2(b) includes other conforming amendments to ERISA 
with regard to state preemption--The bill makes conforming 
amendments to ERISA to clarify the treatment of ERISA's 
preemption rules with regard to AHPs. For certified AHPs, state 
law is preempted to the extent that it would preclude an AHP 
from existing in a state. In addition, state law is also 
preempted in order to allow health insurance issuers to offer 
health insurance coverage of the same policy type as offered in 
connection with a particular AHP to eligible employers, 
regardless of whether such employers are members of the 
particular association. Health insurance coverage policy forms 
filed and approved in a particular state in connection with an 
insurer's offering under an AHP are deemed to be approved in 
any other state in which such coverage is offered when the 
insurer provides a complete filing in the same form and manner 
to the authority in the other state. The bill also makes two 
changes to ERISA's preemption laws regarding MEWAs. First, 
paragraph (6) of section 514(b) is made inapplicable with 
respect to any state law in the case of a certified AHP. 
Second, the bill removes the current restriction on state 
regulation of self-insured multiple employer welfare 
arrangements providing medical care (which do not elect to meet 
the certification requirements for AHPs) under section 
514(b)(6)(A)(ii) by eliminating the requirement that such state 
laws otherwise ``be consistent with the provisions of ERISA 
Title I.'' The bill also amends Section 514 to clarify that the 
preceding amendments to 514 should not be construed to 
supersede or impair the law of any State with respect to 
issuers or health insurance coverage, that provides solvency 
standards or prompt payment of claims.
    Section 3 clarifies the treatment of single employer 
arrangements.
    Section 4 establishes enforcement provisions relating to 
AHPs and multiple employer welfare arrangements (MEWAs): (1) 
willful misrepresentation that an entity is an exempted AHP or 
collectively-bargained arrangement may result in criminal 
penalties; (2) the section provides for cease activity orders 
for arrangements found to be neither licensed, registered, or 
otherwise approved under State insurance law, or operating in 
accordance with the terms of the certification granted by the 
Secretary under Part 8; and (3) the section provides for the 
responsibility of the named fiduciary or board of trustees of 
an AHP to comply with the required claims procedure under 
ERISA.
    Section 5 amends section 506 of ERISA (relating to 
coordination and responsibility of agencies enforcing ERISA and 
related laws) to require the Secretary of Labor to consult with 
state insurance departments with regard to the Secretary's 
authority under section 502 and 504 to enforce provisions 
applicable to certified AHPs.
    Section 6. In general, the amendments made by the act will 
be effective one year after enactment of the Act. In addition, 
the Secretary will be required to issue all regulations needed 
to carry out the amendments within one year after enactment of 
the Act.

                       Explanation of Amendments

    No amendments were accepted by the Committee.
    
    
                             Correspondence

                     Congress of the United States,
                                  House of Representatives,
                                     Washington, DC, April 6, 2005.
Hon. John Boehner,
Chairman, Committee on Education and the Workforce,
Washington, DC.
    Dear Mr. Chairman: Due to other legislative duties, I was 
unavoidably detained during Committee consideration of H.R. 
525, ``Small Business Health Fairness Act of 2005.'' 
Consequently, I missed roll call number three on amendment 
number three offered by Representative McCollum. Had I been 
present, I would have voted against the amendment.
    I would appreciate your including this letter in the 
Committee Report to accompany H.R. 525. Thank you for your 
attention to this matter.
            Sincerely,
                                                Joe Wilson,
                                                Member of Congress.
                                ------                                

                     Congress of the United States,
                                  House of Representatives,
                                     Washington, DC, April 6, 2005.
Hon. John Boehner,
Chairman, Committee on Education and the Workforce,
Washington, DC.
    Dear Mr. Chairman: Due to other legislative duties, I was 
unavoidably detained during Committee consideration of H.R. 
525, ``Small Business Health Fairness Act of 2005''. 
Consequently, I missed Roll Call Vote Number 1, Amendment 
Number 1 offered by Representative Kind, Roll Call Vote Number 
5, Amendment Number 7, offered by Representative Holt, and Roll 
Call Vote Number 6, Amendment Number 10 offered by 
Representative Kucinich. Had I been present, I would have voted 
against each of the amendments.
    I would appreciate your including this letter in the 
Committee Report to accompany H.R. 525. Thank you for your 
attention to this matter.
            Sincerely,
                                               Hon. Kenny Marchant.
                                ------                                

                     Congress of the United States,
                                  House of Representatives,
                                     Washington, DC, April 6, 2005.
Hon. John Boehner,
Chairman, Committee on Education and the Workforce,
Washington, DC.
    Dear Mr. Chairman: Due to other legislative duties, I was 
unavoidably detained during Committee consideration of H.R. 
525, ``Small Business Health Fairness Act of 2005''. 
Consequently, I missed roll call number ONE on amendment 
nunmber ONE offered by Representative Kind. Had I been present, 
I would have voted against the amendment.
    I would appreciate your including this letter in the 
Committee Report to accompany H.R. 525.
    Thank you for your attention to this matter.
            Sincerely,
                                                      Luis Fortuno.

              Application of Law to the Legislative Branch

    Section 102(b)(3) of Public Law 104-1 requires a 
description of the application of this bill to the legislative 
branch. This bill reduces the ranks of the uninsured by 
improving access to health care for uninsured working families, 
particularly those who are employed in small businesses. The 
bill would create association health plans (``AHPs'') that 
would allow small businesses to join together through bona-fide 
trade associations, thus enjoying larger economies of scale 
presently enjoyed by many large corporations and unions, to 
purchase health insurance for their workers at a lower cost 
than they are presently experiencing. H.R. 525 would increase 
small businesses' bargaining power with health care providers, 
give them freedom from costly state mandated benefit packages, 
and lower overhead costs that would better enable them to offer 
health care coverage for their workers. Since ERISA excludes 
governmental plans, the bill does not apply to legislative 
branch employees. As public employees, legislative branch 
employees are eligible to participate in the healthcare offered 
through federal arrangements with private insurers.

  Statement of Oversight Findings and Recommendations of the Committee

    In compliance with clause 3(c)(1) of rule XIII and clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
the Committee's oversight findings and recommendations are 
reflected in the body of this report.

                       Unfunded Mandate Statement

    Section 423 of the Congressional Budget and Impoundment 
Control Act (as amended by Section 101(a)(2) of the Unfunded 
Mandates Reform Act, P.L. 104-4) requires a statement of 
whether the provisions of the reported bill include unfunded 
mandates. This bill reduces the ranks of the uninsured by 
improving access to health care for uninsured working families, 
particularly those who are employed in small businesses. The 
bill would create association health plans (``AHPs'') that 
would allow small businesses to join together through bona fide 
trade associations, thus enjoying larger economies of scale 
presently enjoyed by many large corporations and unions, to 
purchase health insurance for their workers at a lower cost 
than they are presently experiencing. H.R. 525 would increase 
small businesses' bargaining power with health care providers, 
give them freedom from costly state mandated benefit packages, 
and lower overhead costs that would better enable them to offer 
health care coverage for their workers. In compliance with this 
requirement, the Committee has received a letter from the 
Congressional Budget Office included herein.

     Budget Authority and Congressional Budget Office Cost Estimate

    With respect to the requirements of clause 3(c)(2) of rule 
XIII of the House of Representatives and section 308(a) of the 
Congressional Budget Act of 1974 and with respect to 
requirements of 3(c)(3) of rule XIII of the House of 
Representatives and section 402 of the Congressional Budget Act 
of 1974, the Committee has received the following cost estimate 
for H.R. 525 from the Director of the Congressional Budget 
Office:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, April 8, 2005.
Hon. John A. Boehner,
Chairman, Committee on Education and the Workforce,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 525, the Small 
Business Health Fairness Act of 2005.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Shinobu 
Suzuki.
            Sincerely,
                                       Douglas Holtz-Eakin,
                                                          Director.
    Enclosure.

H.R. 525--Small Business Health Fairness Act of 2005

    Summary: H.R. 525 would establish a regulatory framework 
and certification process for association health plans (AHPs). 
AHPs could be established by trade, industry, and professional 
associations as a vehicle for providing health care benefits to 
employees of businesses that are association members. AHPs 
would not, in general, have to offer coverage of state-mandated 
benefits and would be subject in a limited way to state rules 
that compress health insurance premiums across a state's group 
market. Many firms would be able to pay lower health insurance 
premiums by purchasing such coverage through AHPs rather than 
through the traditional small employer health insurance market, 
where premiums would reflect the full extent of state insurance 
regulations. (Self-employed individuals also would be able to 
purchase coverage through AHPs; this analysis of H.R. 525 
includes the impact of AHPs on the health insurance market for 
the self-employed.)
    Because AHPs would be a vehicle for providing health care 
benefits to workers and such benefits are excluded from taxable 
income, enacting H.R. 525 could affect federal tax revenues by 
changing the share of employee compensation furnished as tax-
excluded health benefits as opposed to taxable wages and 
salaries. CBO estimates that H.R. 525 would increase total 
spending on employer-sponsored health insurance, and, as a 
result, reduce federal tax revenues. As a result, CBO estimates 
that enacting H.R. 525 would decrease federal revenues by $3 
million in 2006, by $71 million over the 2006-2010 period, and 
by $261 million over the 2006-2015 period. About $76 million of 
the 10-year revenue loss would be in off-budget Social Security 
payroll taxes.
    By expanding private health insurance coverage to small 
business employees and their dependents, H.R. 525 would 
decrease enrollment in the Medicaid program. The bill also 
would cause some individuals to lose employer coverage and to 
enroll in Medicaid. CBO estimates that the bill would reduce 
net federal spending for Medicaid by $1 million in 2006, by $24 
million over the 2006-2010 period, and by $80 million over the 
2006-2015 period.
    H.R. 525 also would require additional spending for 
administration and regulatory activities by the Department of 
Labor (DoL). CBO estimates that DoL would hire 150 workers over 
the next three years to regulate the AHP market and certify 
AHPs, beginning in 2006. We estimate that implementing this 
provision would cost $4 million in 2006, $55 million over the 
2006-2010 period, and $136 million over the 2006-2015 period, 
assuming the appropriation of the necessary amounts.
    H.R. 525 would preempt a number of state laws that regulate 
health coverage, including the ability of states to tax 
existing entities that become certified as association health 
plans; those preemptions would be intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act (UMRA). The 
preemptions of state regulatory laws would limit the exercise 
of state authority and preclude the application of state laws, 
but would not result in additional costs to state, local, or 
tribal governments. Limitations on state taxing authority, 
however, would result in a net decrease in state revenues of 
over $25 million in 2006. As a greater number of the uninsured 
became insured through association plans, states would, over 
time, realize a net increase in revenues due to the new taxing 
authority. By 2010, that increase would total about $10 
million. The losses that states would face in the early years 
would not exceed the statutory threshold established in UMRA 
($62 million in 2005, adjusted annually for inflation). The 
effects of the bill on Medicaid would result in savings to 
states of $18 million over the 2006-2010 period and $60 million 
over the 2006-2015 period.
    H.R. 525 contains no private-sector mandates as defined in 
UMRA.
    Estimated cost to the Federal government: The estimated 
budgetary impact of H.R. 525 is shown in the following table. 
The effects of this legislation fall within budget functions 
550 (health) and 600 (income security). This estimate assumes 
that H.R. 525 would be enacted by October 1, 2005.

----------------------------------------------------------------------------------------------------------------
                                                     By fiscal year, in millions of dollars--
                                 -------------------------------------------------------------------------------
                                   2006    2007    2008    2009    2010    2011    2012    2013    2014    2015
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Income and HI Payroll Taxes (on-      -2      -5      -9     -14     -19     -23     -25     -27     -29     -32
 budget)........................
Social Security Payroll Taxes         -1      -2      -4      -6      -8      -9     -10     -11     -12     -13
 (off-budget)...................
                                 -------------------------------------------------------------------------------
    Total Changes in Revenues...      -3      -8     -13     -20     -27     -32     -35     -38     -41     -44

                                           CHANGES IN DIRECT SPENDING

Estimated Budget Authority......      -1      -3      -5      -7      -9      -9     -10     -11     -12     -13
Estimated Outlays...............      -1      -3      -5      -7      -9      -9     -10     -11     -12     -13

                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization Level...       4       9      14      14      15      15      16      16      17      17
Estimated Outlays...............       4       9      14      14      15      15      16      16      17      17
----------------------------------------------------------------------------------------------------------------
 Note: HI = Hospital Insurance (Part A of Medicare).

    Basis of estimate: H.R. 525 would allow organizations such 
as trade, industry, and professional associations and chambers 
of commerce to sponsor association health plans for their 
members and affiliated members. These entities, which would be 
certified and regulated to DoL, could provide a range of health 
insurance options to employers under different sets of rules 
than apply to insurers or other health plan arrangements that 
fall under state insurance regulation. In general, an AHP would 
not have to comply with state benefit requirements and would 
not be subject to statewide availability rules, although it 
would have to make its plans available to all members of its 
sponsoring association.
    AHPs could offer both fully-insured health insurance plans 
(products issued by a state-licensed insurance carrier) and, 
subject to certain limitations, self-insured plans. An AHP 
could offer the same fully-insured plans to member firms of its 
sponsoring association in any state; it would only have to 
obtain plan approval in the original state in which it filed. 
(It also would have to comply with the original state's laws 
mandating coverage of certain diseases.) All other states would 
be obligated to accept that approved plan. The bill would not 
exempt health insurance carriers offering AHP coverage from 
state licensing requirements and other state laws regulating 
health insurance except to the extent that the laws and 
regulations would effectively preclude the AHP from offering 
coverage in that state.
    State laws regulating premiums would affect AHPs 
differently than they would carriers in the traditional small 
group health insurance market. In general, fully-insured AHP 
plans would have to abide by the premium-setting regulations of 
each state for their member firms that reside in that state. 
Some states require insurers that offer small-group policies to 
community-rate their premiums (a practice in which the price 
for a given health policy must be the same for all firms 
despite variations in those firms' expected costs per 
enrollee). Other states limit the degree to which premiums for 
a particular policy can vary among firms. Fully-insured AHP 
plans would have to follow the state's rating rules, but the 
premiums they offered would be based on the average expected 
costs per enrollee of the association's Member firms--not on 
the costs of the broader (and potentially more expensive) 
groups that insurers offering traditional coverage must serve 
under availability rules that apply to the traditional small 
group market.
    Self-insured plans offered by AHPs would not be subject to 
state insurance regulations. To offer such coverage, AHPs would 
follow a certification process with the Department of Labor. 
The requirements for certification include meeting certain 
solvency standards and paying $5,000 annually into a fund, 
which would be used by the Secretary of Labor to maintain in 
force excess stop-loss insurance coverage or indemnification 
insurance coverage to ensure payment of the health care claims 
of self-insured AHPs that became insolvent. AHPs would be 
restricted from varying premiums on the basis of health status 
(or industry) except to the extent allowed by each state's 
premium-setting rules for coverage offered through 
associations. In any case, such AHPs could charge different 
premiums to different employers on the basis of factors other 
than health status and industry.
    CBO's estimate of H.R. 525 used an analytical model 
designed to simulate how small firms and their employees would 
respond to the introduction of AHPs.\1\ The model incorporates 
assumptions that characterize economic behavior in the small 
group health insurance market. Those assumptions include the 
responsiveness of firms and their employees to changes in the 
price and quality of health insurance, the variation of health 
insurance premiums likely to occur in the AHP market compared 
with premium variation as it exists today in the regulated 
market for small-group health insurance, savings arising from 
the exemption from state-mandated benefits, and administrative 
cost savings that could be achieved by spreading fixed costs 
over more enrollees.
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office, Increasing Small-Firm Health 
Insurance Coverage Through Association Health Plans and Healthmarts, 
CBO Paper, January 2000.
---------------------------------------------------------------------------
    CBO estimates that, by 2010, when the legislation is 
assumed to have its full impact, about 620,000 more people 
(including employees and their dependents) would be insured 
through small employers than would be insured under current 
law. In total, about 8.5 million people would obtain health 
insurance through association health plans. However, under 
current law, most of those AHP enrollees would have been 
insured in the state-regulated market rather than being 
uninsured. CBO also estimates that about 10,000 people would 
lose coverage in response to rising premiums in the small-group 
market.

Effects on Federal revenues

    The bill would reduce federal tax revenues because the 
share of employee compensation paid in the form of taxable 
wages and salaries would decrease as employers and employees 
spent more on tax-excluded health benefits. That increase in 
net spending on health benefits is the result of several 
factors that move in different directions. In general, spending 
on health benefits would decline for firms that switched from 
coverage purchased in the traditional, state-regulated market 
to AHP coverage due to savings from the exemption from 
requiring certain benefits, and from administrative savings. 
Eligible firms could attain additional premium savings by 
joining an AHP whose members had lower average costs than those 
of the insurance pools existing in the state-regulated market.
    As relatively low-cost firms are attracted to the new AHP 
market, the average costs and thus the premiums facing firms in 
the state-regulated market would increase. In general, firms 
that remained in the state-regulated market would spend more on 
health benefits under the proposal while firms that dropped 
coverage in response to those premium increases would spend 
less on health coverage. Since AHPs would offer lower premiums, 
on average, than did state-regulated insurers, some otherwise-
uninsured firms would become covered through AHPs. For those 
firms, spending on tax-excluded health benefits would increase 
(since they would have spent nothing on health insurance in the 
absence of AHPs).
    CBO estimates that the net effect of those various changes 
would be a small increase in total spending by employers on 
employer-sponsored health insurance. Since the composition of 
the total compensation packages of employees would shift toward 
nontaxable health benefits and away from taxable wages and 
salaries, CBO estimates that total federal revenues would 
decrease by $3 million in 2006, by $71 million over the 2006-
2010 period, and by $261 million over the 2006-2015 period. 
Social Security receipts, which are off-budget, would account 
for about 30 percent of the total.
    The size and direction of the predicted change in employer 
spending on health insurance are sensitive to assumptions about 
the health insurance purchasing behavior of small firms. If 
fewer uninsured firms picked up coverage for their employees 
through the existence of AHPs than CBO has estimated, federal 
revenues could actually increase because aggregate spending by 
employers on health insurance could fall as otherwise-insured 
employees switched to lower-cost AHPs. Alternatively, if more 
otherwise-uninsured firms become covered by AHPs than CBO has 
estimated, the decline in federal revenues would be larger than 
projected because even more employer compensation would take 
the form of tax-excluded health care benefits.

Effects on Medicaid spending

    Because H.R. 525 would increase (on net) the number of 
people with employer-sponsored insurance, it would affect the 
number of people who enroll in Medicaid. Some people who would 
lose employer-sponsored health insurance would enroll in 
Medicaid, whereas others who, under current law, would be 
covered by Medicaid would instead enroll in health insurance 
offered by AHPs. On net, CBO estimates that enacting H.R. 525 
would reduce spending in the Medicaid program by $1 million in 
2006, by $24 million over the 2006-2010 period, and by $80 
million over the 2006-2015 period.
    Medicaid spending for people who lose private coverage. 
About one-third of employees in small firms are in families 
with incomes under 200 percent of the Federal Poverty Line 
(FPL). Many children and some adults in families with incomes 
below 200 percent of the FPL are eligible for Medicaid. CBO 
estimates that about 40 percent of people losing employer-
sponsored coverage would be under 200 percent of the FPL, and 
about one-eighth of them would enroll in Medicaid. CBO assumes 
that those people would be somewhat more costly than the 
average Medicaid-eligible individual, and that federal spending 
for Medicaid would increase by about $38 million over the 2006-
2015 period.
    Medicaid savings for people who gain private coverage. Of 
the people gaining employer-sponsored insurance via AHPs under 
H.R. 525, CBO estimates that approximately 10 percent would be 
under 200 percent of the FPL. Of these, about 40 percent are 
children and 60 percent are adults. About one-third of those 
children would otherwise be enrolled in Medicaid, and about 8 
percent of adults would otherwise be enrolled in Medicaid, CBO 
estimates. Assuming that those children and adults would be 
less costly than average, implementing H.R. 525 would decrease 
federal Medicaid spending by $118 million over the 2006-2015 
period as a result of this shift to private health insurance 
coverage.

Spending subject to appropriation

    The bill also would require additional spending for 
administration and regulatory activities, subject to 
appropriation of the necessary amounts. CBO assumes that DoL 
would hire an additional 150 workers over the next three years 
to certify AHPs and to regulate the AHP market, beginning in 
2006. CBO estimates that DoL would need about 125 employees at 
the GS-12 level (on average) to implement and regulate the 
program and about 25 support staff. We estimate that 
implementing this provision would cost $4 million in 2006, $55 
million over the 2006-2010 period, and $136 million over the 
2006-2015 period, assuming the appropriation of the necessary 
amounts.
     Estimated impact on state, local, and tribal governments: 
H.R. 525 would preempt state laws that would limit an AHP's 
ability to determine which services or items are part of their 
package of health benefits. (A law in the state in which an AHP 
initially filed its policy for approval that prohibits the 
exclusion of specific diseases would still apply, as would 
requirements in the Employee Retirement Income Security Act 
governing minimum maternity stays, mental health benefits, and 
reconstructive surgery following mastectomies.) The bill also 
would preclude states from regulating reserve levels, 
contribution amounts, and trusts of AHPs. Those preemptions 
would not result in additional costs to state, local, or tribal 
governments, but because they would limit the exercise of state 
authority and preclude the application of state laws, they 
would be intergovernmental mandates as defined in UMRA.
    H.R. 525 also would limit the ability of states to tax 
association health plans that operated before the enactment of 
the bill, while allowing states to levy a contribution tax, 
similar to a premium tax, on new AHPs. On the one hand, state 
contribution taxes on new AHPs that become certified under the 
bill would increase state tax collections to the extent that 
those AHPs provide coverage to individuals who were previously 
uninsured. On the other hand, some existing multiple employer 
welfare arrangements (MEWAs) could become certified to operate 
as AHPs, and it is not clear that states would be able to 
collect contribution taxes from them. Some states currently 
levy taxes on MEWAs, so if they were unable to collect the 
contribution tax from MEWAs that became certified AHPs, their 
tax revenues would decrease.
    The combination of these changes would have mixed effects 
on state tax collections, and CBO estimates that the effect 
would be a new decrease in state revenues in the early years 
after enactment, and a net increase in state revenues in later 
years. CBO estimates that state revenues would decrease by over 
$25 million in 2006, but as a greater number of the uninsured 
became insured through association plans, states would realize 
a net increase in revenues due to the contribution tax totaling 
about $10 million in 2010. The losses that states would face in 
the early years would not exceed the statutory threshold 
established in UMRA ($62 million in 2005, adjusted annually for 
inflation).
    The effects of the bill on Medicaid would result in 
estimated savings to states of $18 million over the 2006-2010 
period and $60 million over the 2006-2015 period.
    Estimated impact on the private sector: This bill contains 
no private-sector mandates as defined in UMRA.
     Estimates prepared by: Federal costs: Shinobu Suzuki for 
revenue effects and discretionary spending; Jeanne De Sa and 
Eric Rollins for the Medicaid effects; impact on state, local, 
and tribal governments: Leo Lex; impact on the private sector: 
Stuart Hagen.
     Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

         Statement of General Performance Goals and Objectives

    In accordance with Clause 3(c) of House Rule XIII, the 
goals of H.R. 525 are to reduce the ranks of the uninsured by 
improving access to health care for uninsured working families, 
particularly those who are employed in small businesses. The 
bill would create association health plans (``AHPs'') that 
would allow small businesses to join together through bona-fide 
trade associations, thus enjoying larger economies of scale 
presently enjoyed by many large corporations and unions, to 
purchase health insurance for their workers at a lower cost 
than they are presently experiencing. H.R. 525 would increase 
small businesses' bargaining power with health care providers, 
give them freedom from costly state mandated benefit packages, 
and lower overhead costs that would better enable them to offer 
health care coverage for their workers. The Committee expects 
the Department of Labor to implement the changes to the law in 
accordance with these stated goals.

                   Constitutional Authority Statement

    Under clause 3(d)(1) of rule XIII of the Rules of the House 
of Representatives, the Committee must include a statement 
citing the specific powers granted to Congress in the 
Constitution to enact the law proposed by H.R. 525. The 
Employee Retirement Income Security Act (ERISA) has been 
determined by the federal courts to be within Congress' 
Constitutional authority. In Commercial Mortgage Insurance, 
Inc. v. Citizens National Bank of Dallas, 526 F.Supp. 510 (N.D. 
Tex. 1981), the court held that Congress legitimately concluded 
that employee benefit plans so affected interstate commerce as 
to be within the scope of Congressional powers under Article 1, 
Section 8, Clause 3 of the Constitution of the United States. 
In Murphy v. Wal-Mart Associates' Group Health Plan, 928 
F.Supp. 700 (E.D. Tex 1996), the court upheld the preemption 
provisions of ERISA. Because H.R. 525 modifies but does not 
extend the federal regulation of pensions, the Committee 
believes that the Act falls within the same scope of 
Congressional authority as ERISA.

                           Committee Estimate

    Clause 3(d)(2) of rule XIII of the Rules of the House of 
Representatives requires an estimate and a comparison by the 
Committee of the costs that would be incurred in carrying out 
H.R. 525. However, clause 3(d)(3)(B) of that rule provides that 
this requirement does not apply when the Committee has included 
in its report a timely submitted cost estimate of the bill 
prepared by the Director of the Congressional Budget Office 
under section 402 of the Congressional Budget Act.

                            ADDITIONAL VIEWS

    The stated goal of H.R. 525 is to provide affordable health 
insurance to small businesses that cannot get it today. It is a 
laudable goal that I support. However, as currently written, I 
strongly believe that the Small Business Health Fairness Act 
will not accomplish this goal because of a significant loophole 
that allows an AHP to discriminate against small businesses 
with sick employees based on their ability to ignore state 
rating limitations.
    Despite the title in paragraph (2) of section 805(a) that 
states ``contribution rates must be nondiscriminatory,'' I 
believe the language in subparagraph b(ii) clearly allows an 
AHP to discriminate against a small business based on health 
status inasmuch as state law allows (a practice prohibited 
under ERISA). In my opinion, that is the very definition of a 
loophole.
    During the Committee Markup I offered an amendment to close 
this loophole that will prevent small businesses with a sick 
employee from getting a better price for insurance under an 
AHP, though it ultimately was not agreed to. In the same way 
federal ERISA plans are prohibited from using health status to 
vary rates among its plan participants, my amendment sought to 
prohibit an association health plan from varying rates among 
its participants based on health status. It sought to do so by 
striking the language in subparagraph b(ii) that would allow an 
AHP to discriminate against businesses with sick employees by 
using health status.
    I offered this amendment in a good faith effort to improve 
the legislation, because if this loophole is not closed and 
H.R. 525 eventually becomes law, the cost of healthcare 
insurance will undoubtedly be even higher due to other state-
enacted rating limitations AHPs are free to ignore. This will 
only exacerbate the already unacceptable number of uninsured 
Americans.
    After working in the healthcare industry for over thirty 
years and running several small businesses of my own, I know 
for first-hand that many small employers are struggling to 
afford and maintain coverage for their workers. Small business 
owners want to do the right thing and provide health insurance 
to their workers, but double-digit premium increases are making 
it increasingly difficult to do so.
    In fact, in my home state of Georgia alone, nearly 1.4 
million individuals and families lack health insurance 
coverage. Many of these people work for small-firms, but are 
not offered coverage or cannot afford the premiums. We need to 
do more to assure that health insurance coverage is more 
available and affordable to these small businesses workers.
    One of the proposed ways to help small businesses and their 
employees, though certainly not the only way, is through 
enhanced pooling--one of the key goals of H.R. 525. Broad 
pooling of risk is the very foundation for viable and well-
functioning health insurance markets. Pooling helps assure that 
the premiums of younger, healthier workers subsidize the 
premiums of older, sicker workers. This cross-subsidization of 
premiums is the very essence of pooling.
    Yet while I strongly support the concept of pooling, I am 
very concerned that H.R. 525 will lead to less pooling, not 
more. That is because under H.R. 525, each AHP would be rated 
separately from the state small employer pools and would see 
their premiums directly tied to the health-risk of the group. 
Under AHPs, employers with high-risk workers could bear the 
full-cost of coverage--without any cross subsidies.
    In the 1990s states recognized the need for more pooling 
and protection for high-cost workers by enacting small-employer 
market reforms, including limits on how much insurers can 
charge employers with sick workers. In fact, my own home state 
of Georgia demands insurers to pool all their small businesses 
together for rating purposes while limiting how much employers' 
premiums can vary based on health-status or claims experience. 
Moreover, Georgia law also strictly limits the amount insurers 
can charge at renewal and limits premium increases to only once 
a year.
    Yet the language I attempted to amend, as currently 
written, allows AHPs to preempt state laws that limit how much 
and how often employers' premiums can increase when an employee 
gets sick. This exemption from state rating protections would 
make it difficult, if not impossible, for small business with 
sick employees (or employees with a history of health problems) 
to have access to affordable coverage in an AHP; a loophole I 
find unacceptable.
    Ultimately, my amendment was straightforward, simple and 
completely consistent with the principal goal of the 
legislation--which is to expand access to affordable health 
insurance for small businesses via small employer pooling. 
While it was ultimately not adopted (failing by a 24 to 24 
vote), it underscores the clear division within the Committee 
about allowing AHPs to be exempt from small employer pooling 
laws. AHPs' exemption from these pooling laws will allow them 
the ability to exclude firms with sicker workers by charging 
unaffordable premiums. This will cause premiums to rise for 
most small-firms and leave vulnerable workers at serious risk 
of becoming uninsured.
    While I supported H.R. 525 in Committee and share its 
proponent's goal to provide small businesses with access to 
affordable and high quality healthcare, I am very concerned 
that this bill, as currently written, will hurt the very small 
businesses and employees that its proponents claim to help.
    I am committed to helping small businesses and their 
workers have access to more affordable coverage, but firmly 
believe that the language as currently written actually moves 
us in the wrong direction. It is my hope that in moving this 
bill forward through the legislative process, Congress can 
continue to improve the language I called into question during 
the Committee Markup and find a real solution to make 
healthcare coverage more affordable to hard-pressed small 
businesses, their workers, and their families instead of 
allowing AHPs to discriminate against older, sicker employees.

                                                   Charlie Norwood.

                             MINORITY VIEWS

    Once again, the majority proposed legislation it claims is 
in the interest of the 45 million employees and small employers 
without health insurance, but in fact is likely to reduce their 
health care benefits and coverage.\1\ Rather than proposing 
real solutions for delivering meaningful health coverage for 
uninsured Americans, this legislation will cut health benefits 
for 7 million workers who currently have coverage and make 
coverage more expensive for four out of five small businesses. 
The proposed Association Health Plans (AHPs) would be almost 
entirely exempt from oversight by state regulators, undermining 
coverage for serious diseases and increasing consumers' 
vulnerability to fraud and insolvencies.
---------------------------------------------------------------------------
    \1\ ``The Uninsured and Their Access to Care.'' Publication No.: 
1420-06, The Kaiser Commission on Medicare and the Uninsured, The Henry 
J. Kaiser Family Foundation, December 2004.
---------------------------------------------------------------------------
    Over 80 million Americans lack health coverage for some 
part of a year and are looking to Congress for help.\2\ 
Approximately half of those Americans work for or are family 
members of someone who works for a small employer. Many small 
employers lack the financial resources to afford health 
insurance coverage. These employers, and the workers and family 
members who depend upon them, need solutions that will provide 
an expanded pool for affordable coverage and subsidize the 
costs of low wage workers. HR 525 not only fails to deliver 
help, it actually will reduce health care coverage and raise 
health insurance costs for millions of Americans.
---------------------------------------------------------------------------
    \2\ ``One in Three: Non-Elderly Americans Without Health Insurance, 
2002-2003'' Families USA, June 2004.
---------------------------------------------------------------------------
    The independent Congressional Budget Office analyzed the 
impact of AHP legislation in 2002 and 2003 and concluded:

          `` * * * about 600,000 more people (including 
        employees and their dependents) would be insured 
        through small employers than would be insured under 
        current law. By 2008, about 7.5 million people would 
        obtain health insurance through association health 
        plans. However, under current law, most of those AHP 
        enrollees would have been insured in the state-
        regulated market rather than being uninsured. CBO also 
        estimates that about 10,000 people would lose coverage 
        in response to rising premiums in the small-group 
        market.'' \3\
---------------------------------------------------------------------------
    \3\ Congressional Budget Office Cost Estimate, H.R. 660 Small 
Business Health Fairness Act of 2003, July 11, 2003.

    CBO also warns us that far from reducing health expenses, 
this bill will increase health care costs, because it will 
encourage cherry picking of the most desirable employees, 
leaving the more expensive employers in the current system. CBO 
concluded that AHPs primarily will compete by offering less 
generous benefit packages and thus, reducing coverage for 7 
million workers and families. And those who remain covered by 
non-AHP insurance will pay increased costs to compensate for 
those who are siphoned off into AHPs.
    A 2003 study by Mercer Consultants, commissioned by 
National Small Business United, made even more dire 
predictions. Mercer found that AHP legislation would increase 
the number of the uninsured by 1 million as employers in the 
non-AHP market dropped coverage due to premium increases. 
Health insurance premiums in the non-AHP market were estimated 
to rise 23% due to the exodus of healthier firms to non-
regulated AHPs.\4\
---------------------------------------------------------------------------
    \4\ ``Impact of Association Health Plan Legislation on Premiums and 
Coverage for Small Employers,'' Beth Fritchen and Karen Bender, Mercer 
Risk, Finance & Insurance Consulting, prepared for National Small 
Business Association, 2003.
---------------------------------------------------------------------------
    Rather than expanding health coverage and health services; 
it is going to lead to the reduction of health coverage for 7 
million Americans who will lose the right to vital medical 
coverage such as OB/GYN and pediatrician services, cervical, 
colon, mammography and prostate cancer screening and treatment, 
maternity benefits and well-care child services, and diabetes 
treatment.
    That is why over 1300 local and national organizations 
oppose this bill, including the National Governors Association, 
the Republican Governors Association, Democratic Governors 
Association, 41 state Attorney General, the National 
Association of Insurance Commissioners, National Small Business 
United, Blue Cross Blue Shield, the Association of Health 
Insurance Plans, and well as hundreds of labor, consumer, and 
business groups (see attached list).

  H.R. 525 CUTS BENEFITS FOR MILLIONS OF WORKERS BY OVERRIDING VITAL 
                     STATE CONSUMER PROTECTION LAWS

    Under H.R. 525, AHP generally would have sole discretion to 
select the specific items and services to be covered, 
notwithstanding state laws. AHPs would be exempt from key 
consumer protection laws, including state laws requiring access 
to mammography screening, emergency services, maternity care 
for expectant mother, well-baby care for infants, and other 
protections that ensure appropriate access to health care.
    This bill would result in a two-tiered small group health 
insurance marketplace, one tier consisting primarily of healthy 
individuals and groups who benefit from preemption of state 
health mandates, and another tier comprised significantly of 
sicker individuals and groups who remain subject to state 
consumer protections. As Members of Congress, we should be 
seeking ways to eliminate the health care disparities in 
current markets, not creating new ones.
    The Republican Majority contend that given the choice, AHPs 
will freely choose to provide ample health care coverage. 
However, history demonstrates that for years businesses 
provided health coverage without providing adequate health care 
coverage. Access to mammograms, maternity payments for 
expectant mothers, cancer-screening procedures, well-baby care, 
and other preventive health treatment were routinely omitted in 
health care coverage until states required it.
    States were forced to enact consumer protections because 
businesses did not insist on providing comprehensive coverage 
for their employees. Today, nearly all states and the District 
of Columbia have laws that protect access to mammography 
screening, emergency services, allow direct access to OB/GYNs, 
diabetic supplies and education, and prompt payment rules.\5\
---------------------------------------------------------------------------
    \5\ Blue Cross and Blue Shield Association, December 2002.
---------------------------------------------------------------------------
    More than 25 states and the District of Columbia have laws 
that protect access to prostate cancer screening, cervical 
cancer screening, and well-baby care. Over 30 states have 
mental health parity laws and more than 33 state require 
insurance plans to cover a minimum amount of mental health 
benefits.\6\
---------------------------------------------------------------------------
    \6\ Blue Cross and Blue Shield Association, December 2002.
---------------------------------------------------------------------------
    We believe, as do hundreds of organizations, public 
officials, and health care providers, that state consumer 
protection laws represent significant steps towards Congress' 
goal of improving access to comprehensive health care for all. 
Our Republican colleagues do not. They would prefer to roll 
back the protections we have today. Therefore, the Republican 
Majority rejected each of the 10 amendments offered by 
Democrats to restore consumer protections lost under this 
legislation. Several members of the Majority argued that ``bare 
bones'' coverage was better than no coverage. But, those who 
understand illnesses and health insurance know this often is 
not true. To offer health insurance that does not cover many 
diseases or requires a $1000 or even a $5000 deductible, in 
many cases will be worse than no insurance at all. Individuals 
and employers will pay scarce resources each month for policies 
that will not help them when they need it.

  H.R. 525 ENCOURAGES ``CHERRY-PICKING'' OR ``SKIMMING'' OF YOUNGER, 
                         HEALTHIER POPULATIONS

    In addition to eliminating critical consumer protections, 
the bill permits AHPs to engage in cherry picking, skimming off 
the healthiest consumers and leaving the sickest patients 
uninsured.
    H.R. 525 allows AHPs to offer coverage to specific types of 
employers, allowing plans to seek memberships with better risks 
and less costly populations. In addition, AHPs may offer 
different premiums to each of their member employers. Thus, 
AHPs may charge lower rates for lower risk persons and charge 
far more for higher risk persons, forcing them out of the pool. 
The bill's only restriction is that the difference in premiums 
cannot be health-status based. But the provision is meaningless 
because it permits AHPs to accomplish the same goal by 
``cherry-picking'' and varying premiums based on age, sex, 
race, national origin, or any other key factor of an employer's 
workforce, including claims experience, geography and 
membership.
    Unlike the Republican Majority, we are convinced by the 
Congressional Budget Office (CBO) finding that AHP legislation 
would result in higher premiums for 80 percent of small 
employers, while as many as 7 million of the sickest 
individuals would have reduced coverage.
    Similarly, the Mercer Consulting study found that health 
insurance premiums would increase 23% for small employers that 
continued to purchase state regulated coverage, and the number 
of uninsured would increase by over 1 million as a result of 
coverage losses among workers and their dependents.
    During the committee markup, we supported the amendment 
offered by our Republican colleague Representative Charlie 
Norwood requiring AHPs to charge the same premium to all 
employer groups. However, the Republican Majority rejected this 
amendment, arguing that AHPs have no competitive advantage if 
they cannot limit and control their risks.

 H.R. 525 GIVES AHPS UNPRECEDENTED POWERS THAT LARGE EMPLOYERS DO NOT 
                                 ENJOY

    One of the key arguments made by the supporters of AHPs is 
that some large employers are exempt from state laws and 
therefore, so should be small employers. The supporters fail to 
note that H.R. 525 would provide small employers exemptions 
from state and federal law that far exceed the limited 
exemption large employers enjoy.
    Health insurance generally is regulated by the states, not 
the federal government. When Congress enacted the Employee 
Retirement Income Security Act of 1974 (ERISA), it primarily 
intended to establish federal standards for pension plans. At 
that time, Congress did have some expectation that federal 
regulation of health care was imminent and ERISA broadly 
preempted state laws that regulated all employee benefit plans. 
In 1985, the Supreme Court, in Metropolitan Life Insurance Co. 
v. Massachusetts, 471 US 724, held that employer health plans 
that were provided through insurance were subject to state law, 
but when employers provided health care directly, through self-
insurance, they were exempt from state laws.
    H.R. 525 would give small employers far broader protection 
than larger employers currently enjoy under ERISA. First, H.R. 
525 exempts all AHP plans, self-insured and insured, from state 
regulation. Second, large employers currently cannot cherry-
pick among their employees the same way AHPs are allowed to 
under H.R. 525. Under ERISA, employers that self-insure are 
prohibited from varying premiums charged based on health 
status. Further, employers are subject to civil rights law 
prohibitions on discrimination on the basis of race, sex, age, 
national origin, etc. As a result, large employers charge all 
employees the same premium varying only by family size and 
geography (due to varying local costs). In contrast, H.R. 525 
specifically authorized AHPs to discriminate in premiums. AHPs 
may vary premiums among employers on any basis except health 
status and AHPs may increase premiums of individual employers 
based upon their claims experience. Finally, H.R. 525 is not 
limited to small employers. Large employers may join AHPs and 
may well do so based on H.R. 525's almost complete exemption 
from state insurance regulation and consumer protection laws.

                 AHPS WOULD OPERATE LARGELY UNREGULATED

    Regulation of insurance and public health has traditionally 
been the province of the states. H.R. 525 eliminates centuries 
of state law that establish minimum standards for the conduct 
of the business of insurance, and raises important questions 
about the future ability of states to regulate health insurance 
at all.
    By allowing insurers who sell to AHPs to set up shop in a 
state with very lenient rules and oversight and market to small 
employers without meeting any state's rules, states would be 
rendered powerless to take action even where there is obvious 
risk to consumers.
    We strongly disagree with the provisions of H.R. 525 that 
would federalize oversight of AHPs, but that provide the 
Department of Labor (DOL) with minimal specific and general 
regulatory authority over AHPs. States are in the business of 
regulating insurance for good reason. States can shut down 
fraudulent health plans faster than DOL. States can shut down 
crooked health plans by issuing emergency cease-and-desist 
orders within days, while DOL can take several years. 
Additionally, DOL lacks sufficient staff and budget. A 2004 
report by the former Deputy Secretary of Labor under the first 
Bush Administration, Roderick A. DeArment, has concluded that 
DOL is not able to adequately regulate AHPs.\7\
---------------------------------------------------------------------------
    \7\ ``The Department of Labor lacks the staffing, experience, and 
regulatory authority to effectively regulate Association Health 
Plans'', Roderick A. DeArment, Business Law Brief, Spring 2004.
---------------------------------------------------------------------------
    Most state attorneys general, plus state governors, 
insurance regulators and state insurance legislators also 
publicly agree sole federal oversight of AHPs would expose 
small businesses to potentially widespread scams. In a June 11, 
2003 press release, the Coalition Against Insurance Fraud 
stated, ``State oversight is a vital part of the safety net our 
businesses need to help ensure health coverage provides 
reliable protection, not empty promises.''
    Experience with another form of health insurance pooling 
without adequate accountability already exist; Multiple 
Employer Welfare Arrangements (MEWAs). We know from past 
experience that these plans can harm consumers. MEWA fraud and 
abuse problems have resulted in 400,000 uninsured consumers 
with over $123 million in unpaid medical bills.\8\
---------------------------------------------------------------------------
    \8\ ``MEWAs: The threat of Plan Insolvency and Other Challenges'', 
Mila Kofman, Eliza Bangit and Kevin Lucia, Health Policy Institute, 
Georgetown University, commissioned by the Commonwealth Fund, March 
2004.
---------------------------------------------------------------------------

      H.R. 525 FAILS TO ADDRESS REAL PROBLEMS OF SMALL BUSINESSES

    H.R. 525 does not address the major reasons that small 
businesses do not offer health insurance coverage--lack of 
stability, lack of profitability, and generally low wage 
workforces. A majority of small businesses do not survive their 
first year of operations and a small minority exist after 3 
years of operation. And the majority of small business 
workforces employ low wage employees. Over half the uninsured 
earn less than two times the poverty rate. A minimum wage 
worker earns $1000 a month. An individual health insurance 
policy costs over $300 a month and a family policy costs over 
$800 a month. In order for a small business to offer health 
coverage to a low wage employee, at a 50% employer contribution 
rate, it would mean that a 10-30% salary increase for these 
workers would be necessary. These employers are unlikely to be 
able to afford such an increase and many of these employees 
would choose cash over health insurance.
    CBO analyzed AHP legislation in 2003 and concluded much the 
same. Of the 45 million uninsured, CBO concluded that only 
600,000 would receive coverage under AHPs. CBO concluded that 
AHPs primarily would cover employers who already have coverage 
and shift to cheaper AHP plans, potentially 7 million 
individuals.

                       THE DEMOCRATIC ALTERNATIVE

    During markup, Representatives Kind and Andrews offered an 
amendment in the nature of a substitute that would authorize 
the Secretary of Labor and states to create small employer 
health plans similar to the Federal Employees Health Benefit 
Plan, without cutting vital health benefits. The substitute 
provides small businesses the same access and health care 
coverage that federal employees have. It also would authorize 
funds to provide subsidies to employers with low wage 
workforces recognizing the reality that most small employers 
cannot significantly increase spending for these workers.
    The Democratic alternative allows all employers with fewer 
than 100 employees during the previous calendar to be eligible 
to apply for coverage under the federal or state plans. 
Employers must offer coverage to all employees who have 
completed 3 months of service. Employees working fewer than 30 
hours a week are eligible for pro rata coverage. It authorizes 
the Secretary and the states to establish an initial open 
enrollment period and thereafter an annual enrollment period. 
Small employers currently providing coverage are provided a 
one-time election to join the federal or state plan during the 
initial open enrollment period. The substitute would require 
the Department of Labor to annually contract with state 
licensed health insurers to offer health insurance coverage in 
a state. Participating insurers remain subject to state laws 
applicable to the states in which they cover residents.
    During Committee mark-up a number of other amendments were 
offered that would have addressed many of the bill's 
substantial deficiencies and maintained needed state law 
consumer protections. Representative McCollum offered an 
amendment to require AHPs to abide by state laws ensuring 
maternal and child care coverage; Representative McCarthy and 
Woolsey offered an amendment to protect state laws on 
mammography and cervical cancer screening coverage; 
Representative Holt offered amendments to protect state laws on 
mental health benefits and access to contraceptive coverage; 
Representatives Kildee and Hinojosa offered an amendment to 
retain state laws covering diabetes treatment; Representative 
Kind offered an amendment to protect state laws for treatment 
of autism; Representatives Tierney an Van Hollen offered an 
amendment to require Association Health Plans to comply with 
state patients' bill of rights protections, such as direct 
access to OB/GYNs, prudent layperson decision making standards, 
coverage of non-formulary prescription drugs in certain 
situations, access to hospital emergency room treatment; and 
independent external review of coverage decisions; 
Representative Scott offered an amendment to assure that AHPs 
have adequate capital as under NAIC model capital standards; 
and Representative Kucinich offered an amendment to ensure 
disclosure of pharmaceutical costs. The Majority rejected all 
of these amendments that would have protected consumers.
    For these reasons the minority believes that HR 525 is 
fatally flawed and will reduce rather than improve health care 
coverage and benefits for American workers and their families.


                                   George Miller.
                                   Raul M. Grijalva.
                                   Robert C. ``Bobby'' Scott.
                                   Dale E. Kildee.
                                   John F. Tierney.
                                   Ruben Hinojosa.
                                   Major R. Owens.
                                   Dennis J. Kucinich.
                                   Betty McCollum.
                                   Carolyn McCarthy.
                                   Lynn Woolsey.
                                   Ron Kind.
                                   Chris Van Hollen.
                                   Timothy Bishop.
                                   David Wu.
                                   Tim Ryan.
                                   Robert Andrews.
                                   Donald M. Payne.
                                   Danny K. Davis.
                                   Susan Davis.
                                   Rush Holt.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

            EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

                   SHORT TITLE AND TABLE OF CONTENTS

  Section 1. This Act may be cited as the ``Employee Retirement 
Income Security Act of 1974''.

                            TABLE OF CONTENTS

Sec. 1. Short title and table of contents.

             TITLE I--PROTECTION OF EMPLOYEE BENEFIT RIGHTS

     * * * * * * *

                      Subpart B--Other Requirements

Sec. 711. Standards relating to benefits for mothers and newborns.
     * * * * * * *

            Part 8--Rules Governing Association Health Plans

801. Association health plans.
802. Certification of association health plans.
803. Requirements relating to sponsors and boards of trustees.
804. Participation and coverage requirements.
805. Other requirements relating to plan documents, contribution rates, 
          and benefit options.
806. Maintenance of reserves and provisions for solvency for plans 
          providing health benefits in addition to health insurance 
          coverage.
807. Requirements for application and related requirements.
808. Notice requirements for voluntary termination.
809. Corrective actions and mandatory termination.
810. Trusteeship by the Secretary of insolvent association health plans 
          providing health benefits in addition to health insurance 
          coverage.
811. State assessment authority.
812. Definitions and rules of construction.

           *       *       *       *       *       *       *


             TITLE I--PROTECTION OF EMPLOYEE BENEFIT RIGHTS

Subtitle A--General Provisions

           *       *       *       *       *       *       *


                              DEFINITIONS

  Sec. 3. For purposes of this title:
  (1)  * * *

           *       *       *       *       *       *       *

  (16)(A)  * * *
  (B) The term ``plan sponsor'' means (i) the employer in the 
case of an employee benefit plan established or maintained by a 
single employer, (ii) the employee organization in the case of 
a plan established or maintained by an employee organization, 
or (iii) in the case of a plan established or maintained by two 
or more employers or jointly by one or more employers and one 
or more employee organizations, the association, committee, 
joint board of trustees, or other similar group of 
representatives of the parties who establish or maintain the 
plan. Such term also includes a person serving as the sponsor 
of an association health plan under part 8.

           *       *       *       *       *       *       *

  (40)(A)  * * *
  (B) For purposes of this paragraph--
          (i) two or more trades or businesses, whether or not 
        incorporated, shall be deemed a single employer if such 
        trades or businesses are within the same control group, 
        except that, in any case in which the benefit referred 
        to in subparagraph (A) consists of medical care (as 
        defined in section 812(a)(2)), two or more trades or 
        businesses, whether or not incorporated, shall be 
        deemed a single employer for any plan year of such 
        plan, or any fiscal year of such other arrangement, if 
        such trades or businesses are within the same control 
        group during such year or at any time during the 
        preceding 1-year period,

           *       *       *       *       *       *       *

          [(iii) the determination] (iii)(I) in any case in 
        which the benefit referred to in subparagraph (A) 
        consists of medical care (as defined in section 
        812(a)(2)), the determination of whether a trade or 
        business is under ``common control'' with another trade 
        or business shall be determined under regulations of 
        the Secretary applying principles consistent and 
        coextensive with the principles applied in determining 
        whether employees of two or more trades or businesses 
        are treated as employed by a single employer under 
        section 4001(b), except that, for purposes of this 
        paragraph, an interest of greater than 25 percent may 
        not be required as the minimum interest necessary for 
        common control, or
          (II) in any other case, the determination of whether 
        a trade or business is under ``common control'' with 
        another trade or business shall be determined under 
        regulations of the Secretary applying principles 
        similar to the principles applied in determining 
        whether employees of two or more trades or businesses 
        are treated as employed by a single employer under 
        section 4001(b), except that, for purposes of this 
        paragraph, common control shall not be based on an 
        interest of less than 25 percent,
          (iv) in any case in which the benefit referred to in 
        subparagraph (A) consists of medical care (as defined 
        in section 812(a)(2)), in determining, after the 
        application of clause (i), whether benefits are 
        provided to employees of two or more employers, the 
        arrangement shall be treated as having only one 
        participating employer if, after the application of 
        clause (i), the number of individuals who are employees 
        and former employees of any one participating employer 
        and who are covered under the arrangement is greater 
        than 75 percent of the aggregate number of all 
        individuals who are employees or former employees of 
        participating employers and who are covered under the 
        arrangement,
          [(iv)] (v) the term ``rural electric cooperative'' 
        means--
                  (I)  * * *

           *       *       *       *       *       *       *

          [(v)] (vi) the term ``rural telephone cooperative 
        association'' means an organization described in 
        paragraph (4) or (6) of section 501(c) of the Internal 
        Revenue Code of 1986 which is exempt from tax under 
        section 501(a) of such Code and at least 80 percent of 
        the members of which are organizations engaged 
        primarily in providing telephone service to rural areas 
        of the United States on a mutual, cooperative, or other 
        basis.

           *       *       *       *       *       *       *


                   Subtitle B--Regulatory Provisions 

Part 1--Reporting and Disclosure

           *       *       *       *       *       *       *


                        SUMMARY PLAN DESCRIPTION

  Sec. 102. (a)  * * *
  (b) The summary plan description shall contain the following 
information: The name and type of administration of the plan; 
in the case of a group health plan (as defined in section 
733(a)(1)), whether a health insurance issuer (as defined in 
section 733(b)(2)) is responsible for the financing or 
administration (including payment of claims) of the plan and 
(if so) the name and address of such issuer; the name and 
address of the person designated as agent for the service of 
legal process, if such person is not the administrator; the 
name and address of the administrator; names, titles, and 
addresses of any trustee or trustees (if they are persons 
different from the administrator); a description of the 
relevant provisions of any applicable collective bargaining 
agreement; the plan's requirements respecting eligibility for 
participation and benefits; a description of the provisions 
providing for nonforfeitable pension benefits; circumstances 
which may result in disqualification, ineligibility, or denial 
or loss of benefits; the source of financing of the plan and 
the identity of any organization through which benefits are 
provided; the date of the end of the plan year and whether the 
records of the plan are kept on a calendar, policy, or fiscal 
year basis; the procedures to be followed in presenting claims 
for benefits under the plan including the office at the 
Department of Labor through which participants and 
beneficiaries may seek assistance or information regarding 
their rights under this Act and the Health Insurance 
Portability and Accountability Act of 1996 with respect to 
health benefits that are offered through a group health plan 
(as defined in section 733(a)(1)) and the remedies available 
under the plan for the redress of claims which are denied in 
whole or in part (including procedures required under section 
503 of this Act). An association health plan shall include in 
its summary plan description, in connection with each benefit 
option, a description of the form of solvency or guarantee fund 
protection secured pursuant to this Act or applicable State 
law, if any.

           *       *       *       *       *       *       *


                 Part 5--Administration and Enforcement

                           CRIMINAL PENALTIES

  Sec. 501. (a) Any person who willfully violates any provision 
of part 1 of this subtitle, or any regulation or order issued 
under any such provision, shall upon conviction be fined not 
more than $100,000 or imprisoned not more than 10 years, or 
both; except that in the case of such violation by a person not 
an individual, the fine imposed upon such person shall be a 
fine not exceeding $500,000.
  (b) Any person who willfully falsely represents, to any 
employee, any employee's beneficiary, any employer, the 
Secretary, or any State, a plan or other arrangement 
established or maintained for the purpose of offering or 
providing any benefit described in section 3(1) to employees or 
their beneficiaries as--
          (1) being an association health plan which has been 
        certified under part 8;
          (2) having been established or maintained under or 
        pursuant to one or more collective bargaining 
        agreements which are reached pursuant to collective 
        bargaining described in section 8(d) of the National 
        Labor Relations Act (29 U.S.C. 158(d)) or paragraph 
        Fourth of section 2 of the Railway Labor Act (45 U.S.C. 
        152, paragraph Fourth) or which are reached pursuant to 
        labor-management negotiations under similar provisions 
        of State public employee relations laws; or
          (3) being a plan or arrangement described in section 
        3(40)(A)(i),
shall, upon conviction, be imprisoned not more than 5 years, be 
fined under title 18, United States Code, or both.

                           CIVIL ENFORCEMENT

  Sec. 502. (a)  * * *

           *       *       *       *       *       *       *

  (n) Association Health Plan Cease and Desist Orders.--
          (1) In general.--Subject to paragraph (2), upon 
        application by the Secretary showing the operation, 
        promotion, or marketing of an association health plan 
        (or similar arrangement providing benefits consisting 
        of medical care (as defined in section 733(a)(2))) 
        that--
                  (A) is not certified under part 8, is subject 
                under section 514(b)(6) to the insurance laws 
                of any State in which the plan or arrangement 
                offers or provides benefits, and is not 
                licensed, registered, or otherwise approved 
                under the insurance laws of such State; or
                  (B) is an association health plan certified 
                under part 8 and is not operating in accordance 
                with the requirements under part 8 for such 
                certification,
        a district court of the United States shall enter an 
        order requiring that the plan or arrangement cease 
        activities.
          (2) Exception.--Paragraph (1) shall not apply in the 
        case of an association health plan or other arrangement 
        if the plan or arrangement shows that--
                  (A) all benefits under it referred to in 
                paragraph (1) consist of health insurance 
                coverage; and
                  (B) with respect to each State in which the 
                plan or arrangement offers or provides 
                benefits, the plan or arrangement is operating 
                in accordance with applicable State laws that 
                are not superseded under section 514.
          (3) Additional equitable relief.--The court may grant 
        such additional equitable relief, including any relief 
        available under this title, as it deems necessary to 
        protect the interests of the public and of persons 
        having claims for benefits against the plan.

                            CLAIMS PROCEDURE

  Sec. 503. (a) In General.--In accordance with regulations of 
the Secretary, every employee benefit plan shall--
          (1)  * * *

           *       *       *       *       *       *       *

  (b) Association Health Plans.--The terms of each association 
health plan which is or has been certified under part 8 shall 
require the board of trustees or the named fiduciary (as 
applicable) to ensure that the requirements of this section are 
met in connection with claims filed under the plan.

           *       *       *       *       *       *       *


    COORDINATION AND RESPONSIBILITY OF AGENCIES ENFORCING EMPLOYEE 
        RETIREMENT INCOME SECURITY ACT AND RELATED FEDERAL LAWS

  Sec. 506. (a)  * * *

           *       *       *       *       *       *       *

  (d) Consultation With States With Respect to Association 
Health Plans.--
          (1) Agreements with states.--The Secretary shall 
        consult with the State recognized under paragraph (2) 
        with respect to an association health plan regarding 
        the exercise of--
                  (A) the Secretary's authority under sections 
                502 and 504 to enforce the requirements for 
                certification under part 8; and
                  (B) the Secretary's authority to certify 
                association health plans under part 8 in 
                accordance with regulations of the Secretary 
                applicable to certification under part 8.
          (2) Recognition of primary domicile state.--In 
        carrying out paragraph (1), the Secretary shall ensure 
        that only one State will be recognized, with respect to 
        any particular association health plan, as the State 
        with which consultation is required. In carrying out 
        this paragraph--
                  (A) in the case of a plan which provides 
                health insurance coverage (as defined in 
                section 812(a)(3)), such State shall be the 
                State with which filing and approval of a 
                policy type offered by the plan was initially 
                obtained, and
                  (B) in any other case, the Secretary shall 
                take into account the places of residence of 
                the participants and beneficiaries under the 
                plan and the State in which the trust is 
                maintained.

           *       *       *       *       *       *       *


                          EFFECT ON OTHER LAWS

  Sec. 514. (a)  * * *
  (b)(1)  * * *

           *       *       *       *       *       *       *

  (4) [Subsection (a)] Subsections (a) and (d) shall not apply 
to any generally applicable criminal law of a State.
  (5)(A) Except as provided in subparagraph (B), [subsection 
(a)] subsection (a) of this section and subsections (a)(2)(B) 
and (b) of section 805 shall not apply to the Hawaii Prepaid 
Health Care Act (Haw. Rev. Stat. Sec. Sec. 393-1 through 393-
51).
  (B) Nothing in subparagraph (A) shall be construed to exempt 
from [subsection (a)] subsection (a) of this section or 
subsection (a)(2)(B) or (b) of section 805--
          (i)  * * *

           *       *       *       *       *       *       *

  (6)(A) Notwithstanding any other provision of this section--
          (i) in the case of an employee welfare benefit plan 
        which is a multiple employer welfare arrangement and is 
        fully insured (or which is a multiple employer welfare 
        arrangement subject to an exemption under subparagraph 
        (B)), any law of any State which regulates insurance 
        may apply to such arrangement to the extent that such 
        law provides--
                  (I)  * * *
                  (II) provisions to enforce such standards, 
                [and]
          (ii) in the case of any other employee welfare 
        benefit plan which is a multiple employer welfare 
        arrangement, and which does not provide medical care 
        (within the meaning of section 733(a)(2)), in addition 
        to this title, any law of any State which regulates 
        insurance may apply to the extent not inconsistent with 
        the preceding sections of this [title.] title, and
          (iii) subject to subparagraph (E), in the case of any 
        other employee welfare benefit plan which is a multiple 
        employer welfare arrangement and which provides medical 
        care (within the meaning of section 733(a)(2)), any law 
        of any State which regulates insurance may apply.

           *       *       *       *       *       *       *

  (E) The preceding subparagraphs of this paragraph do not 
apply with respect to any State law in the case of an 
association health plan which is certified under part 8.

           *       *       *       *       *       *       *

  (d)(1) Except as provided in subsection (b)(4), the 
provisions of this title shall supersede any and all State laws 
insofar as they may now or hereafter preclude, or have the 
effect of precluding, a health insurance issuer from offering 
health insurance coverage in connection with an association 
health plan which is certified under part 8.
  (2) Except as provided in paragraphs (4) and (5) of 
subsection (b) of this section--
          (A) In any case in which health insurance coverage of 
        any policy type is offered under an association health 
        plan certified under part 8 to a participating employer 
        operating in such State, the provisions of this title 
        shall supersede any and all laws of such State insofar 
        as they may preclude a health insurance issuer from 
        offering health insurance coverage of the same policy 
        type to other employers operating in the State which 
        are eligible for coverage under such association health 
        plan, whether or not such other employers are 
        participating employers in such plan.
          (B) In any case in which health insurance coverage of 
        any policy type is offered in a State under an 
        association health plan certified under part 8 and the 
        filing, with the applicable State authority (as defined 
        in section 812(a)(9)), of the policy form in connection 
        with such policy type is approved by such State 
        authority, the provisions of this title shall supersede 
        any and all laws of any other State in which health 
        insurance coverage of such type is offered, insofar as 
        they may preclude, upon the filing in the same form and 
        manner of such policy form with the applicable State 
        authority in such other State, the approval of the 
        filing in such other State.
  (3) Nothing in subsection (b)(6)(E) or the preceding 
provisions of this subsection shall be construed, with respect 
to health insurance issuers or health insurance coverage, to 
supersede or impair the law of any State--
          (A) providing solvency standards or similar standards 
        regarding the adequacy of insurer capital, surplus, 
        reserves, or contributions, or
          (B) relating to prompt payment of claims.
  (4) For additional provisions relating to association health 
plans, see subsections (a)(2)(B) and (b) of section 805.
  (5) For purposes of this subsection, the term ``association 
health plan'' has the meaning provided in section 801(a), and 
the terms ``health insurance coverage'', ``participating 
employer'', and ``health insurance issuer'' have the meanings 
provided such terms in section 812, respectively.
  [(d) Nothing] (e)(1) Except as provided in paragraph (2), 
nothing in this title shall be construed to alter, amend, 
modify, invalidate, impair, or supersede any law of the United 
States (except as provided in sections 111 and 507(b)) or any 
rule or regulation issued under any such law.
  (2) Nothing in any other provision of law enacted on or after 
the date of the enactment of the Small Business Health Fairness 
Act of 2005 shall be construed to alter, amend, modify, 
invalidate, impair, or supersede any provision of this title, 
except by specific cross-reference to the affected section.

           *       *       *       *       *       *       *


Part 7--Group Health Plan Requirements 

           *       *       *       *       *       *       *


                     Subpart C--General Provisions

SEC. 731. PREEMPTION; STATE FLEXIBILITY; CONSTRUCTION.

  (a)  * * *

           *       *       *       *       *       *       *

  (c) Rules of Construction.--Except as provided in section 
711, nothing in this part or part 8 shall be construed as 
requiring a group health plan or health insurance coverage to 
provide specific benefits under the terms of such plan or 
coverage.

           *       *       *       *       *       *       *


            PART 8--RULES GOVERNING ASSOCIATION HEALTH PLANS

SEC. 801. ASSOCIATION HEALTH PLANS.

  (a) In General.--For purposes of this part, the term 
``association health plan'' means a group health plan whose 
sponsor is (or is deemed under this part to be) described in 
subsection (b).
  (b) Sponsorship.--The sponsor of a group health plan is 
described in this subsection if such sponsor--
          (1) is organized and maintained in good faith, with a 
        constitution and bylaws specifically stating its 
        purpose and providing for periodic meetings on at least 
        an annual basis, as a bona fide trade association, a 
        bona fide industry association (including a rural 
        electric cooperative association or a rural telephone 
        cooperative association), a bona fide professional 
        association, or a bona fide chamber of commerce (or 
        similar bona fide business association, including a 
        corporation or similar organization that operates on a 
        cooperative basis (within the meaning of section 1381 
        of the Internal Revenue Code of 1986)), for substantial 
        purposes other than that of obtaining or providing 
        medical care;
          (2) is established as a permanent entity which 
        receives the active support of its members and requires 
        for membership payment on a periodic basis of dues or 
        payments necessary to maintain eligibility for 
        membership in the sponsor; and
          (3) does not condition membership, such dues or 
        payments, or coverage under the plan on the basis of 
        health status-related factors with respect to the 
        employees of its members (or affiliated members), or 
        the dependents of such employees, and does not 
        condition such dues or payments on the basis of group 
        health plan participation.
Any sponsor consisting of an association of entities which meet 
the requirements of paragraphs (1), (2), and (3) shall be 
deemed to be a sponsor described in this subsection.

SEC. 802. CERTIFICATION OF ASSOCIATION HEALTH PLANS.

  (a) In General.--The applicable authority shall prescribe by 
regulation a procedure under which, subject to subsection (b), 
the applicable authority shall certify association health plans 
which apply for certification as meeting the requirements of 
this part.
  (b) Standards.--Under the procedure prescribed pursuant to 
subsection (a), in the case of an association health plan that 
provides at least one benefit option which does not consist of 
health insurance coverage, the applicable authority shall 
certify such plan as meeting the requirements of this part only 
if the applicable authority is satisfied that the applicable 
requirements of this part are met (or, upon the date on which 
the plan is to commence operations, will be met) with respect 
to the plan.
  (c) Requirements Applicable to Certified Plans.--An 
association health plan with respect to which certification 
under this part is in effect shall meet the applicable 
requirements of this part, effective on the date of 
certification (or, if later, on the date on which the plan is 
to commence operations).
  (d) Requirements for Continued Certification.--The applicable 
authority may provide by regulation for continued certification 
of association health plans under this part.
  (e) Class Certification for Fully Insured Plans.--The 
applicable authority shall establish a class certification 
procedure for association health plans under which all benefits 
consist of health insurance coverage. Under such procedure, the 
applicable authority shall provide for the granting of 
certification under this part to the plans in each class of 
such association health plans upon appropriate filing under 
such procedure in connection with plans in such class and 
payment of the prescribed fee under section 807(a).
  (f) Certification of Self-Insured Association Health Plans.--
An association health plan which offers one or more benefit 
options which do not consist of health insurance coverage may 
be certified under this part only if such plan consists of any 
of the following:
          (1) a plan which offered such coverage on the date of 
        the enactment of the Small Business Health Fairness Act 
        of 2005,
          (2) a plan under which the sponsor does not restrict 
        membership to one or more trades and businesses or 
        industries and whose eligible participating employers 
        represent a broad cross-section of trades and 
        businesses or industries, or
          (3) a plan whose eligible participating employers 
        represent one or more trades or businesses, or one or 
        more industries, consisting of any of the following: 
        agriculture; equipment and automobile dealerships; 
        barbering and cosmetology; certified public accounting 
        practices; child care; construction; dance, theatrical 
        and orchestra productions; disinfecting and pest 
        control; financial services; fishing; foodservice 
        establishments; hospitals; labor organizations; 
        logging; manufacturing (metals); mining; medical and 
        dental practices; medical laboratories; professional 
        consulting services; sanitary services; transportation 
        (local and freight); warehousing; wholesaling/
        distributing; or any other trade or business or 
        industry which has been indicated as having average or 
        above-average risk or health claims experience by 
        reason of State rate filings, denials of coverage, 
        proposed premium rate levels, or other means 
        demonstrated by such plan in accordance with 
        regulations.

SEC. 803. REQUIREMENTS RELATING TO SPONSORS AND BOARDS OF TRUSTEES.

  (a) Sponsor.--The requirements of this subsection are met 
with respect to an association health plan if the sponsor has 
met (or is deemed under this part to have met) the requirements 
of section 801(b) for a continuous period of not less than 3 
years ending with the date of the application for certification 
under this part.
  (b) Board of Trustees.--The requirements of this subsection 
are met with respect to an association health plan if the 
following requirements are met:
          (1) Fiscal control.--The plan is operated, pursuant 
        to a trust agreement, by a board of trustees which has 
        complete fiscal control over the plan and which is 
        responsible for all operations of the plan.
          (2) Rules of operation and financial controls.--The 
        board of trustees has in effect rules of operation and 
        financial controls, based on a 3-year plan of 
        operation, adequate to carry out the terms of the plan 
        and to meet all requirements of this title applicable 
        to the plan.
          (3) Rules governing relationship to participating 
        employers and to contractors.--
                  (A) Board membership.--
                          (i) In general.--Except as provided 
                        in clauses (ii) and (iii), the members 
                        of the board of trustees are 
                        individuals selected from individuals 
                        who are the owners, officers, 
                        directors, or employees of the 
                        participating employers or who are 
                        partners in the participating employers 
                        and actively participate in the 
                        business.
                          (ii) Limitation.--
                                  (I) General rule.--Except as 
                                provided in subclauses (II) and 
                                (III), no such member is an 
                                owner, officer, director, or 
                                employee of, or partner in, a 
                                contract administrator or other 
                                service provider to the plan.
                                  (II) Limited exception for 
                                providers of services solely on 
                                behalf of the sponsor.--
                                Officers or employees of a 
                                sponsor which is a service 
                                provider (other than a contract 
                                administrator) to the plan may 
                                be members of the board if they 
                                constitute not more than 25 
                                percent of the membership of 
                                the board and they do not 
                                provide services to the plan 
                                other than on behalf of the 
                                sponsor.
                                  (III) Treatment of providers 
                                of medical care.--In the case 
                                of a sponsor which is an 
                                association whose membership 
                                consists primarily of providers 
                                of medical care, subclause (I) 
                                shall not apply in the case of 
                                any service provider described 
                                in subclause (I) who is a 
                                provider of medical care under 
                                the plan.
                          (iii) Certain plans excluded.--Clause 
                        (i) shall not apply to an association 
                        health plan which is in existence on 
                        the date of the enactment of the Small 
                        Business Health Fairness Act of 2005.
                  (B) Sole authority.--The board has sole 
                authority under the plan to approve 
                applications for participation in the plan and 
                to contract with a service provider to 
                administer the day-to-day affairs of the plan.
  (c) Treatment of Franchise Networks.--In the case of a group 
health plan which is established and maintained by a franchiser 
for a franchise network consisting of its franchisees--
          (1) the requirements of subsection (a) and section 
        801(a) shall be deemed met if such requirements would 
        otherwise be met if the franchiser were deemed to be 
        the sponsor referred to in section 801(b), such network 
        were deemed to be an association described in section 
        801(b), and each franchisee were deemed to be a member 
        (of the association and the sponsor) referred to in 
        section 801(b); and
          (2) the requirements of section 804(a)(1) shall be 
        deemed met.
The Secretary may by regulation define for purposes of this 
subsection the terms ``franchiser'', ``franchise network'', and 
``franchisee''.

SEC. 804. PARTICIPATION AND COVERAGE REQUIREMENTS.

  (a) Covered Employers and Individuals.--The requirements of 
this subsection are met with respect to an association health 
plan if, under the terms of the plan--
          (1) each participating employer must be--
                  (A) a member of the sponsor,
                  (B) the sponsor, or
                  (C) an affiliated member of the sponsor with 
                respect to which the requirements of subsection 
                (b) are met,
        except that, in the case of a sponsor which is a 
        professional association or other individual-based 
        association, if at least one of the officers, 
        directors, or employees of an employer, or at least one 
        of the individuals who are partners in an employer and 
        who actively participates in the business, is a member 
        or such an affiliated member of the sponsor, 
        participating employers may also include such employer; 
        and
          (2) all individuals commencing coverage under the 
        plan after certification under this part must be--
                  (A) active or retired owners (including self-
                employed individuals), officers, directors, or 
                employees of, or partners in, participating 
                employers; or
                  (B) the beneficiaries of individuals 
                described in subparagraph (A).
  (b) Coverage of Previously Uninsured Employees.--In the case 
of an association health plan in existence on the date of the 
enactment of the Small Business Health Fairness Act of 2005, an 
affiliated member of the sponsor of the plan may be offered 
coverage under the plan as a participating employer only if--
          (1) the affiliated member was an affiliated member on 
        the date of certification under this part; or
          (2) during the 12-month period preceding the date of 
        the offering of such coverage, the affiliated member 
        has not maintained or contributed to a group health 
        plan with respect to any of its employees who would 
        otherwise be eligible to participate in such 
        association health plan.
  (c) Individual Market Unaffected.--The requirements of this 
subsection are met with respect to an association health plan 
if, under the terms of the plan, no participating employer may 
provide health insurance coverage in the individual market for 
any employee not covered under the plan which is similar to the 
coverage contemporaneously provided to employees of the 
employer under the plan, if such exclusion of the employee from 
coverage under the plan is based on a health status-related 
factor with respect to the employee and such employee would, 
but for such exclusion on such basis, be eligible for coverage 
under the plan.
  (d) Prohibition of Discrimination Against Employers and 
Employees Eligible to Participate.--The requirements of this 
subsection are met with respect to an association health plan 
if--
          (1) under the terms of the plan, all employers 
        meeting the preceding requirements of this section are 
        eligible to qualify as participating employers for all 
        geographically available coverage options, unless, in 
        the case of any such employer, participation or 
        contribution requirements of the type referred to in 
        section 2711 of the Public Health Service Act are not 
        met;
          (2) upon request, any employer eligible to 
        participate is furnished information regarding all 
        coverage options available under the plan; and
          (3) the applicable requirements of sections 701, 702, 
        and 703 are met with respect to the plan.

SEC. 805. OTHER REQUIREMENTS RELATING TO PLAN DOCUMENTS, CONTRIBUTION 
                    RATES, AND BENEFIT OPTIONS.

  (a) In General.--The requirements of this section are met 
with respect to an association health plan if the following 
requirements are met:
          (1) Contents of governing instruments.--The 
        instruments governing the plan include a written 
        instrument, meeting the requirements of an instrument 
        required under section 402(a)(1), which--
                  (A) provides that the board of trustees 
                serves as the named fiduciary required for 
                plans under section 402(a)(1) and serves in the 
                capacity of a plan administrator (referred to 
                in section 3(16)(A));
                  (B) provides that the sponsor of the plan is 
                to serve as plan sponsor (referred to in 
                section 3(16)(B)); and
                  (C) incorporates the requirements of section 
                806.
          (2) Contribution rates must be nondiscriminatory.--
                  (A) The contribution rates for any 
                participating small employer do not vary on the 
                basis of any health status-related factor in 
                relation to employees of such employer or their 
                beneficiaries and do not vary on the basis of 
                the type of business or industry in which such 
                employer is engaged.
                  (B) Nothing in this title or any other 
                provision of law shall be construed to preclude 
                an association health plan, or a health 
                insurance issuer offering health insurance 
                coverage in connection with an association 
                health plan, from--
                          (i) setting contribution rates based 
                        on the claims experience of the plan; 
                        or
                          (ii) varying contribution rates for 
                        small employers in a State to the 
                        extent that such rates could vary using 
                        the same methodology employed in such 
                        State for regulating premium rates in 
                        the small group market with respect to 
                        health insurance coverage offered in 
                        connection with bona fide associations 
                        (within the meaning of section 
                        2791(d)(3) of the Public Health Service 
                        Act),
                subject to the requirements of section 702(b) 
                relating to contribution rates.
          (3) Floor for number of covered individuals with 
        respect to certain plans.--If any benefit option under 
        the plan does not consist of health insurance coverage, 
        the plan has as of the beginning of the plan year not 
        fewer than 1,000 participants and beneficiaries.
          (4) Marketing requirements.--
                  (A) In general.--If a benefit option which 
                consists of health insurance coverage is 
                offered under the plan, State-licensed 
                insurance agents shall be used to distribute to 
                small employers coverage which does not consist 
                of health insurance coverage in a manner 
                comparable to the manner in which such agents 
                are used to distribute health insurance 
                coverage.
                  (B) State-licensed insurance agents.--For 
                purposes of subparagraph (A), the term ``State-
                licensed insurance agents'' means one or more 
                agents who are licensed in a State and are 
                subject to the laws of such State relating to 
                licensure, qualification, testing, examination, 
                and continuing education of persons authorized 
                to offer, sell, or solicit health insurance 
                coverage in such State.
          (5) Regulatory requirements.--Such other requirements 
        as the applicable authority determines are necessary to 
        carry out the purposes of this part, which shall be 
        prescribed by the applicable authority by regulation.
  (b) Ability of Association Health Plans to Design Benefit 
Options.--Subject to section 514(d), nothing in this part or 
any provision of State law (as defined in section 514(c)(1)) 
shall be construed to preclude an association health plan, or a 
health insurance issuer offering health insurance coverage in 
connection with an association health plan, from exercising its 
sole discretion in selecting the specific items and services 
consisting of medical care to be included as benefits under 
such plan or coverage, except (subject to section 514) in the 
case of (1) any law to the extent that it is not preempted 
under section 731(a)(1) with respect to matters governed by 
section 711, 712, or 713, or (2) any law of the State with 
which filing and approval of a policy type offered by the plan 
was initially obtained to the extent that such law prohibits an 
exclusion of a specific disease from such coverage.

SEC. 806. MAINTENANCE OF RESERVES AND PROVISIONS FOR SOLVENCY FOR PLANS 
                    PROVIDING HEALTH BENEFITS IN ADDITION TO HEALTH 
                    INSURANCE COVERAGE.

  (a) In General.--The requirements of this section are met 
with respect to an association health plan if--
          (1) the benefits under the plan consist solely of 
        health insurance coverage; or
          (2) if the plan provides any additional benefit 
        options which do not consist of health insurance 
        coverage, the plan--
                  (A) establishes and maintains reserves with 
                respect to such additional benefit options, in 
                amounts recommended by the qualified actuary, 
                consisting of--
                          (i) a reserve sufficient for unearned 
                        contributions;
                          (ii) a reserve sufficient for benefit 
                        liabilities which have been incurred, 
                        which have not been satisfied, and for 
                        which risk of loss has not yet been 
                        transferred, and for expected 
                        administrative costs with respect to 
                        such benefit liabilities;
                          (iii) a reserve sufficient for any 
                        other obligations of the plan; and
                          (iv) a reserve sufficient for a 
                        margin of error and other fluctuations, 
                        taking into account the specific 
                        circumstances of the plan; and
                  (B) establishes and maintains aggregate and 
                specific excess /stop loss insurance and 
                solvency indemnification, with respect to such 
                additional benefit options for which risk of 
                loss has not yet been transferred, as follows:
                          (i) The plan shall secure aggregate 
                        excess /stop loss insurance for the 
                        plan with an attachment point which is 
                        not greater than 125 percent of 
                        expected gross annual claims. The 
                        applicable authority may by regulation 
                        provide for upward adjustments in the 
                        amount of such percentage in specified 
                        circumstances in which the plan 
                        specifically provides for and maintains 
                        reserves in excess of the amounts 
                        required under subparagraph (A).
                          (ii) The plan shall secure specific 
                        excess /stop loss insurance for the 
                        plan with an attachment point which is 
                        at least equal to an amount recommended 
                        by the plan's qualified actuary. The 
                        applicable authority may by regulation 
                        provide for adjustments in the amount 
                        of such insurance in specified 
                        circumstances in which the plan 
                        specifically provides for and maintains 
                        reserves in excess of the amounts 
                        required under subparagraph (A).
                          (iii) The plan shall secure 
                        indemnification insurance for any 
                        claims which the plan is unable to 
                        satisfy by reason of a plan 
                        termination.
Any person issuing to a plan insurance described in clause (i), 
(ii), or (iii) of subparagraph (B) shall notify the Secretary 
of any failure of premium payment meriting cancellation of the 
policy prior to undertaking such a cancellation. Any 
regulations prescribed by the applicable authority pursuant to 
clause (i) or (ii) of subparagraph (B) may allow for such 
adjustments in the required levels of excess /stop loss 
insurance as the qualified actuary may recommend, taking into 
account the specific circumstances of the plan.
  (b) Minimum Surplus in Addition to Claims Reserves.--In the 
case of any association health plan described in subsection 
(a)(2), the requirements of this subsection are met if the plan 
establishes and maintains surplus in an amount at least equal 
to--
          (1) $500,000, or
          (2) such greater amount (but not greater than 
        $2,000,000) as may be set forth in regulations 
        prescribed by the applicable authority, considering the 
        level of aggregate and specific excess /stop loss 
        insurance provided with respect to such plan and other 
        factors related to solvency risk, such as the plan's 
        projected levels of participation or claims, the nature 
        of the plan's liabilities, and the types of assets 
        available to assure that such liabilities are met.
  (c) Additional Requirements.--In the case of any association 
health plan described in subsection (a)(2), the applicable 
authority may provide such additional requirements relating to 
reserves, excess /stop loss insurance, and indemnification 
insurance as the applicable authority considers appropriate. 
Such requirements may be provided by regulation with respect to 
any such plan or any class of such plans.
  (d) Adjustments for Excess /Stop Loss Insurance.--The 
applicable authority may provide for adjustments to the levels 
of reserves otherwise required under subsections (a) and (b) 
with respect to any plan or class of plans to take into account 
excess /stop loss insurance provided with respect to such plan 
or plans.
  (e) Alternative Means of Compliance.--The applicable 
authority may permit an association health plan described in 
subsection (a)(2) to substitute, for all or part of the 
requirements of this section (except subsection 
(a)(2)(B)(iii)), such security, guarantee, hold-harmless 
arrangement, or other financial arrangement as the applicable 
authority determines to be adequate to enable the plan to fully 
meet all its financial obligations on a timely basis and is 
otherwise no less protective of the interests of participants 
and beneficiaries than the requirements for which it is 
substituted. The applicable authority may take into account, 
for purposes of this subsection, evidence provided by the plan 
or sponsor which demonstrates an assumption of liability with 
respect to the plan. Such evidence may be in the form of a 
contract of indemnification, lien, bonding, insurance, letter 
of credit, recourse under applicable terms of the plan in the 
form of assessments of participating employers, security, or 
other financial arrangement.
  (f) Measures to Ensure Continued Payment of Benefits by 
Certain Plans in Distress.--
          (1) Payments by certain plans to association health 
        plan fund.--
                  (A) In general.--In the case of an 
                association health plan described in subsection 
                (a)(2), the requirements of this subsection are 
                met if the plan makes payments into the 
                Association Health Plan Fund under this 
                subparagraph when they are due. Such payments 
                shall consist of annual payments in the amount 
                of $5,000, and, in addition to such annual 
                payments, such supplemental payments as the 
                Secretary may determine to be necessary under 
                paragraph (2). Payments under this paragraph 
                are payable to the Fund at the time determined 
                by the Secretary. Initial payments are due in 
                advance of certification under this part. 
                Payments shall continue to accrue until a 
                plan's assets are distributed pursuant to a 
                termination procedure.
                  (B) Penalties for failure to make payments.--
                If any payment is not made by a plan when it is 
                due, a late payment charge of not more than 100 
                percent of the payment which was not timely 
                paid shall be payable by the plan to the Fund.
                  (C) Continued duty of the secretary.--The 
                Secretary shall not cease to carry out the 
                provisions of paragraph (2) on account of the 
                failure of a plan to pay any payment when due.
          (2) Payments by secretary to continue excess /stop 
        loss insurance coverage and indemnification insurance 
        coverage for certain plans.--In any case in which the 
        applicable authority determines that there is, or that 
        there is reason to believe that there will be: (A) a 
        failure to take necessary corrective actions under 
        section 809(a) with respect to an association health 
        plan described in subsection (a)(2); or (B) a 
        termination of such a plan under section 809(b) or 
        810(b)(8) (and, if the applicable authority is not the 
        Secretary, certifies such determination to the 
        Secretary), the Secretary shall determine the amounts 
        necessary to make payments to an insurer (designated by 
        the Secretary) to maintain in force excess /stop loss 
        insurance coverage or indemnification insurance 
        coverage for such plan, if the Secretary determines 
        that there is a reasonable expectation that, without 
        such payments, claims would not be satisfied by reason 
        of termination of such coverage. The Secretary shall, 
        to the extent provided in advance in appropriation 
        Acts, pay such amounts so determined to the insurer 
        designated by the Secretary.
          (3) Association health plan fund.--
                  (A) In general.--There is established on the 
                books of the Treasury a fund to be known as the 
                ``Association Health Plan Fund''. The Fund 
                shall be available for making payments pursuant 
                to paragraph (2). The Fund shall be credited 
                with payments received pursuant to paragraph 
                (1)(A), penalties received pursuant to 
                paragraph (1)(B); and earnings on investments 
                of amounts of the Fund under subparagraph (B).
                  (B) Investment.--Whenever the Secretary 
                determines that the moneys of the fund are in 
                excess of current needs, the Secretary may 
                request the investment of such amounts as the 
                Secretary determines advisable by the Secretary 
                of the Treasury in obligations issued or 
                guaranteed by the United States.
  (g) Excess /Stop Loss Insurance.--For purposes of this 
section--
          (1) Aggregate excess /stop loss insurance.--The term 
        ``aggregate excess /stop loss insurance'' means, in 
        connection with an association health plan, a 
        contract--
                  (A) under which an insurer (meeting such 
                minimum standards as the applicable authority 
                may prescribe by regulation) provides for 
                payment to the plan with respect to aggregate 
                claims under the plan in excess of an amount or 
                amounts specified in such contract;
                  (B) which is guaranteed renewable; and
                  (C) which allows for payment of premiums by 
                any third party on behalf of the insured plan.
          (2) Specific excess /stop loss insurance.--The term 
        ``specific excess /stop loss insurance'' means, in 
        connection with an association health plan, a 
        contract--
                  (A) under which an insurer (meeting such 
                minimum standards as the applicable authority 
                may prescribe by regulation) provides for 
                payment to the plan with respect to claims 
                under the plan in connection with a covered 
                individual in excess of an amount or amounts 
                specified in such contract in connection with 
                such covered individual;
                  (B) which is guaranteed renewable; and
                  (C) which allows for payment of premiums by 
                any third party on behalf of the insured plan.
  (h) Indemnification Insurance.--For purposes of this section, 
the term ``indemnification insurance'' means, in connection 
with an association health plan, a contract--
          (1) under which an insurer (meeting such minimum 
        standards as the applicable authority may prescribe by 
        regulation) provides for payment to the plan with 
        respect to claims under the plan which the plan is 
        unable to satisfy by reason of a termination pursuant 
        to section 809(b) (relating to mandatory termination);
          (2) which is guaranteed renewable and noncancellable 
        for any reason (except as the applicable authority may 
        prescribe by regulation); and
          (3) which allows for payment of premiums by any third 
        party on behalf of the insured plan.
  (i) Reserves.--For purposes of this section, the term 
``reserves'' means, in connection with an association health 
plan, plan assets which meet the fiduciary standards under part 
4 and such additional requirements regarding liquidity as the 
applicable authority may prescribe by regulation.
  (j) Solvency Standards Working Group.--
          (1) In general.--Within 90 days after the date of the 
        enactment of the Small Business Health Fairness Act of 
        2005, the applicable authority shall establish a 
        Solvency Standards Working Group. In prescribing the 
        initial regulations under this section, the applicable 
        authority shall take into account the recommendations 
        of such Working Group.
          (2) Membership.--The Working Group shall consist of 
        not more than 15 members appointed by the applicable 
        authority. The applicable authority shall include among 
        persons invited to membership on the Working Group at 
        least one of each of the following:
                  (A) a representative of the National 
                Association of Insurance Commissioners;
                  (B) a representative of the American Academy 
                of Actuaries;
                  (C) a representative of the State 
                governments, or their interests;
                  (D) a representative of existing self-insured 
                arrangements, or their interests;
                  (E) a representative of associations of the 
                type referred to in section 801(b)(1), or their 
                interests; and
                  (F) a representative of multiemployer plans 
                that are group health plans, or their 
                interests.

SEC. 807. REQUIREMENTS FOR APPLICATION AND RELATED REQUIREMENTS.

  (a) Filing Fee.--Under the procedure prescribed pursuant to 
section 802(a), an association health plan shall pay to the 
applicable authority at the time of filing an application for 
certification under this part a filing fee in the amount of 
$5,000, which shall be available in the case of the Secretary, 
to the extent provided in appropriation Acts, for the sole 
purpose of administering the certification procedures 
applicable with respect to association health plans.
  (b) Information To Be Included in Application for 
Certification.--An application for certification under this 
part meets the requirements of this section only if it 
includes, in a manner and form which shall be prescribed by the 
applicable authority by regulation, at least the following 
information:
          (1) Identifying information.--The names and addresses 
        of--
                  (A) the sponsor; and
                  (B) the members of the board of trustees of 
                the plan.
          (2) States in which plan intends to do business.--The 
        States in which participants and beneficiaries under 
        the plan are to be located and the number of them 
        expected to be located in each such State.
          (3) Bonding requirements.--Evidence provided by the 
        board of trustees that the bonding requirements of 
        section 412 will be met as of the date of the 
        application or (if later) commencement of operations.
          (4) Plan documents.--A copy of the documents 
        governing the plan (including any bylaws and trust 
        agreements), the summary plan description, and other 
        material describing the benefits that will be provided 
        to participants and beneficiaries under the plan.
          (5) Agreements with service providers.--A copy of any 
        agreements between the plan and contract administrators 
        and other service providers.
          (6) Funding report.--In the case of association 
        health plans providing benefits options in addition to 
        health insurance coverage, a report setting forth 
        information with respect to such additional benefit 
        options determined as of a date within the 120-day 
        period ending with the date of the application, 
        including the following:
                  (A) Reserves.--A statement, certified by the 
                board of trustees of the plan, and a statement 
                of actuarial opinion, signed by a qualified 
                actuary, that all applicable requirements of 
                section 806 are or will be met in accordance 
                with regulations which the applicable authority 
                shall prescribe.
                  (B) Adequacy of contribution rates.--A 
                statement of actuarial opinion, signed by a 
                qualified actuary, which sets forth a 
                description of the extent to which contribution 
                rates are adequate to provide for the payment 
                of all obligations and the maintenance of 
                required reserves under the plan for the 12-
                month period beginning with such date within 
                such 120-day period, taking into account the 
                expected coverage and experience of the plan. 
                If the contribution rates are not fully 
                adequate, the statement of actuarial opinion 
                shall indicate the extent to which the rates 
                are inadequate and the changes needed to ensure 
                adequacy.
                  (C) Current and projected value of assets and 
                liabilities.--A statement of actuarial opinion 
                signed by a qualified actuary, which sets forth 
                the current value of the assets and liabilities 
                accumulated under the plan and a projection of 
                the assets, liabilities, income, and expenses 
                of the plan for the 12-month period referred to 
                in subparagraph (B). The income statement shall 
                identify separately the plan's administrative 
                expenses and claims.
                  (D) Costs of coverage to be charged and other 
                expenses.--A statement of the costs of coverage 
                to be charged, including an itemization of 
                amounts for administration, reserves, and other 
                expenses associated with the operation of the 
                plan.
                  (E) Other information.--Any other information 
                as may be determined by the applicable 
                authority, by regulation, as necessary to carry 
                out the purposes of this part.
  (c) Filing Notice of Certification With States.--A 
certification granted under this part to an association health 
plan shall not be effective unless written notice of such 
certification is filed with the applicable State authority of 
each State in which at least 25 percent of the participants and 
beneficiaries under the plan are located. For purposes of this 
subsection, an individual shall be considered to be located in 
the State in which a known address of such individual is 
located or in which such individual is employed.
  (d) Notice of Material Changes.--In the case of any 
association health plan certified under this part, descriptions 
of material changes in any information which was required to be 
submitted with the application for the certification under this 
part shall be filed in such form and manner as shall be 
prescribed by the applicable authority by regulation. The 
applicable authority may require by regulation prior notice of 
material changes with respect to specified matters which might 
serve as the basis for suspension or revocation of the 
certification.
  (e) Reporting Requirements for Certain Association Health 
Plans.--An association health plan certified under this part 
which provides benefit options in addition to health insurance 
coverage for such plan year shall meet the requirements of 
section 103 by filing an annual report under such section which 
shall include information described in subsection (b)(6) with 
respect to the plan year and, notwithstanding section 
104(a)(1)(A), shall be filed with the applicable authority not 
later than 90 days after the close of the plan year (or on such 
later date as may be prescribed by the applicable authority). 
The applicable authority may require by regulation such interim 
reports as it considers appropriate.
  (f) Engagement of Qualified Actuary.--The board of trustees 
of each association health plan which provides benefits options 
in addition to health insurance coverage and which is applying 
for certification under this part or is certified under this 
part shall engage, on behalf of all participants and 
beneficiaries, a qualified actuary who shall be responsible for 
the preparation of the materials comprising information 
necessary to be submitted by a qualified actuary under this 
part. The qualified actuary shall utilize such assumptions and 
techniques as are necessary to enable such actuary to form an 
opinion as to whether the contents of the matters reported 
under this part--
          (1) are in the aggregate reasonably related to the 
        experience of the plan and to reasonable expectations; 
        and
          (2) represent such actuary's best estimate of 
        anticipated experience under the plan.
The opinion by the qualified actuary shall be made with respect 
to, and shall be made a part of, the annual report.

SEC. 808. NOTICE REQUIREMENTS FOR VOLUNTARY TERMINATION.

  Except as provided in section 809(b), an association health 
plan which is or has been certified under this part may 
terminate (upon or at any time after cessation of accruals in 
benefit liabilities) only if the board of trustees, not less 
than 60 days before the proposed termination date--
          (1) provides to the participants and beneficiaries a 
        written notice of intent to terminate stating that such 
        termination is intended and the proposed termination 
        date;
          (2) develops a plan for winding up the affairs of the 
        plan in connection with such termination in a manner 
        which will result in timely payment of all benefits for 
        which the plan is obligated; and
          (3) submits such plan in writing to the applicable 
        authority.
Actions required under this section shall be taken in such form 
and manner as may be prescribed by the applicable authority by 
regulation.

SEC. 809. CORRECTIVE ACTIONS AND MANDATORY TERMINATION.

  (a) Actions to Avoid Depletion of Reserves.--An association 
health plan which is certified under this part and which 
provides benefits other than health insurance coverage shall 
continue to meet the requirements of section 806, irrespective 
of whether such certification continues in effect. The board of 
trustees of such plan shall determine quarterly whether the 
requirements of section 806 are met. In any case in which the 
board determines that there is reason to believe that there is 
or will be a failure to meet such requirements, or the 
applicable authority makes such a determination and so notifies 
the board, the board shall immediately notify the qualified 
actuary engaged by the plan, and such actuary shall, not later 
than the end of the next following month, make such 
recommendations to the board for corrective action as the 
actuary determines necessary to ensure compliance with section 
806. Not later than 30 days after receiving from the actuary 
recommendations for corrective actions, the board shall notify 
the applicable authority (in such form and manner as the 
applicable authority may prescribe by regulation) of such 
recommendations of the actuary for corrective action, together 
with a description of the actions (if any) that the board has 
taken or plans to take in response to such recommendations. The 
board shall thereafter report to the applicable authority, in 
such form and frequency as the applicable authority may specify 
to the board, regarding corrective action taken by the board 
until the requirements of section 806 are met.
  (b) Mandatory Termination.--In any case in which--
          (1) the applicable authority has been notified under 
        subsection (a) (or by an issuer of excess /stop loss 
        insurance or indemnity insurance pursuant to section 
        806(a)) of a failure of an association health plan 
        which is or has been certified under this part and is 
        described in section 806(a)(2) to meet the requirements 
        of section 806 and has not been notified by the board 
        of trustees of the plan that corrective action has 
        restored compliance with such requirements; and
          (2) the applicable authority determines that there is 
        a reasonable expectation that the plan will continue to 
        fail to meet the requirements of section 806,
the board of trustees of the plan shall, at the direction of 
the applicable authority, terminate the plan and, in the course 
of the termination, take such actions as the applicable 
authority may require, including satisfying any claims referred 
to in section 806(a)(2)(B)(iii) and recovering for the plan any 
liability under subsection (a)(2)(B)(iii) or (e) of section 
806, as necessary to ensure that the affairs of the plan will 
be, to the maximum extent possible, wound up in a manner which 
will result in timely provision of all benefits for which the 
plan is obligated.

SEC. 810. TRUSTEESHIP BY THE SECRETARY OF INSOLVENT ASSOCIATION HEALTH 
                    PLANS PROVIDING HEALTH BENEFITS IN ADDITION TO 
                    HEALTH INSURANCE COVERAGE.

  (a) Appointment of Secretary as Trustee for Insolvent 
Plans.--Whenever the Secretary determines that an association 
health plan which is or has been certified under this part and 
which is described in section 806(a)(2) will be unable to 
provide benefits when due or is otherwise in a financially 
hazardous condition, as shall be defined by the Secretary by 
regulation, the Secretary shall, upon notice to the plan, apply 
to the appropriate United States district court for appointment 
of the Secretary as trustee to administer the plan for the 
duration of the insolvency. The plan may appear as a party and 
other interested persons may intervene in the proceedings at 
the discretion of the court. The court shall appoint such 
Secretary trustee if the court determines that the trusteeship 
is necessary to protect the interests of the participants and 
beneficiaries or providers of medical care or to avoid any 
unreasonable deterioration of the financial condition of the 
plan. The trusteeship of such Secretary shall continue until 
the conditions described in the first sentence of this 
subsection are remedied or the plan is terminated.
  (b) Powers as Trustee.--The Secretary, upon appointment as 
trustee under subsection (a), shall have the power--
          (1) to do any act authorized by the plan, this title, 
        or other applicable provisions of law to be done by the 
        plan administrator or any trustee of the plan;
          (2) to require the transfer of all (or any part) of 
        the assets and records of the plan to the Secretary as 
        trustee;
          (3) to invest any assets of the plan which the 
        Secretary holds in accordance with the provisions of 
        the plan, regulations prescribed by the Secretary, and 
        applicable provisions of law;
          (4) to require the sponsor, the plan administrator, 
        any participating employer, and any employee 
        organization representing plan participants to furnish 
        any information with respect to the plan which the 
        Secretary as trustee may reasonably need in order to 
        administer the plan;
          (5) to collect for the plan any amounts due the plan 
        and to recover reasonable expenses of the trusteeship;
          (6) to commence, prosecute, or defend on behalf of 
        the plan any suit or proceeding involving the plan;
          (7) to issue, publish, or file such notices, 
        statements, and reports as may be required by the 
        Secretary by regulation or required by any order of the 
        court;
          (8) to terminate the plan (or provide for its 
        termination in accordance with section 809(b)) and 
        liquidate the plan assets, to restore the plan to the 
        responsibility of the sponsor, or to continue the 
        trusteeship;
          (9) to provide for the enrollment of plan 
        participants and beneficiaries under appropriate 
        coverage options; and
          (10) to do such other acts as may be necessary to 
        comply with this title or any order of the court and to 
        protect the interests of plan participants and 
        beneficiaries and providers of medical care.
  (c) Notice of Appointment.--As soon as practicable after the 
Secretary's appointment as trustee, the Secretary shall give 
notice of such appointment to--
          (1) the sponsor and plan administrator;
          (2) each participant;
          (3) each participating employer; and
          (4) if applicable, each employee organization which, 
        for purposes of collective bargaining, represents plan 
        participants.
  (d) Additional Duties.--Except to the extent inconsistent 
with the provisions of this title, or as may be otherwise 
ordered by the court, the Secretary, upon appointment as 
trustee under this section, shall be subject to the same duties 
as those of a trustee under section 704 of title 11, United 
States Code, and shall have the duties of a fiduciary for 
purposes of this title.
  (e) Other Proceedings.--An application by the Secretary under 
this subsection may be filed notwithstanding the pendency in 
the same or any other court of any bankruptcy, mortgage 
foreclosure, or equity receivership proceeding, or any 
proceeding to reorganize, conserve, or liquidate such plan or 
its property, or any proceeding to enforce a lien against 
property of the plan.
  (f) Jurisdiction of Court.--
          (1) In general.--Upon the filing of an application 
        for the appointment as trustee or the issuance of a 
        decree under this section, the court to which the 
        application is made shall have exclusive jurisdiction 
        of the plan involved and its property wherever located 
        with the powers, to the extent consistent with the 
        purposes of this section, of a court of the United 
        States having jurisdiction over cases under chapter 11 
        of title 11, United States Code. Pending an 
        adjudication under this section such court shall stay, 
        and upon appointment by it of the Secretary as trustee, 
        such court shall continue the stay of, any pending 
        mortgage foreclosure, equity receivership, or other 
        proceeding to reorganize, conserve, or liquidate the 
        plan, the sponsor, or property of such plan or sponsor, 
        and any other suit against any receiver, conservator, 
        or trustee of the plan, the sponsor, or property of the 
        plan or sponsor. Pending such adjudication and upon the 
        appointment by it of the Secretary as trustee, the 
        court may stay any proceeding to enforce a lien against 
        property of the plan or the sponsor or any other suit 
        against the plan or the sponsor.
          (2) Venue.--An action under this section may be 
        brought in the judicial district where the sponsor or 
        the plan administrator resides or does business or 
        where any asset of the plan is situated. A district 
        court in which such action is brought may issue process 
        with respect to such action in any other judicial 
        district.
  (g) Personnel.--In accordance with regulations which shall be 
prescribed by the Secretary, the Secretary shall appoint, 
retain, and compensate accountants, actuaries, and other 
professional service personnel as may be necessary in 
connection with the Secretary's service as trustee under this 
section.

SEC. 811. STATE ASSESSMENT AUTHORITY.

  (a) In General.--Notwithstanding section 514, a State may 
impose by law a contribution tax on an association health plan 
described in section 806(a)(2), if the plan commenced 
operations in such State after the date of the enactment of the 
Small Business Health Fairness Act of 2005.
  (b) Contribution Tax.--For purposes of this section, the term 
``contribution tax'' imposed by a State on an association 
health plan means any tax imposed by such State if--
          (1) such tax is computed by applying a rate to the 
        amount of premiums or contributions, with respect to 
        individuals covered under the plan who are residents of 
        such State, which are received by the plan from 
        participating employers located in such State or from 
        such individuals;
          (2) the rate of such tax does not exceed the rate of 
        any tax imposed by such State on premiums or 
        contributions received by insurers or health 
        maintenance organizations for health insurance coverage 
        offered in such State in connection with a group health 
        plan;
          (3) such tax is otherwise nondiscriminatory; and
          (4) the amount of any such tax assessed on the plan 
        is reduced by the amount of any tax or assessment 
        otherwise imposed by the State on premiums, 
        contributions, or both received by insurers or health 
        maintenance organizations for health insurance 
        coverage, aggregate excess /stop loss insurance (as 
        defined in section 806(g)(1)), specific excess /stop 
        loss insurance (as defined in section 806(g)(2)), other 
        insurance related to the provision of medical care 
        under the plan, or any combination thereof provided by 
        such insurers or health maintenance organizations in 
        such State in connection with such plan.

SEC. 812. DEFINITIONS AND RULES OF CONSTRUCTION.

  (a) Definitions.--For purposes of this part--
          (1) Group health plan.--The term ``group health 
        plan'' has the meaning provided in section 733(a)(1) 
        (after applying subsection (b) of this section).
          (2) Medical care.--The term ``medical care'' has the 
        meaning provided in section 733(a)(2).
          (3) Health insurance coverage.--The term ``health 
        insurance coverage'' has the meaning provided in 
        section 733(b)(1).
          (4) Health insurance issuer.--The term ``health 
        insurance issuer'' has the meaning provided in section 
        733(b)(2).
          (5) Applicable authority.--The term ``applicable 
        authority'' means the Secretary, except that, in 
        connection with any exercise of the Secretary's 
        authority regarding which the Secretary is required 
        under section 506(d) to consult with a State, such term 
        means the Secretary, in consultation with such State.
          (6) Health status-related factor.--The term ``health 
        status-related factor'' has the meaning provided in 
        section 733(d)(2).
          (7) Individual market.--
                  (A) In general.--The term ``individual 
                market'' means the market for health insurance 
                coverage offered to individuals other than in 
                connection with a group health plan.
                  (B) Treatment of very small groups.--
                          (i) In general.--Subject to clause 
                        (ii), such term includes coverage 
                        offered in connection with a group 
                        health plan that has fewer than 2 
                        participants as current employees or 
                        participants described in section 
                        732(d)(3) on the first day of the plan 
                        year.
                          (ii) State exception.--Clause (i) 
                        shall not apply in the case of health 
                        insurance coverage offered in a State 
                        if such State regulates the coverage 
                        described in such clause in the same 
                        manner and to the same extent as 
                        coverage in the small group market (as 
                        defined in section 2791(e)(5) of the 
                        Public Health Service Act) is regulated 
                        by such State.
          (8) Participating employer.--The term ``participating 
        employer'' means, in connection with an association 
        health plan, any employer, if any individual who is an 
        employee of such employer, a partner in such employer, 
        or a self-employed individual who is such employer (or 
        any dependent, as defined under the terms of the plan, 
        of such individual) is or was covered under such plan 
        in connection with the status of such individual as 
        such an employee, partner, or self-employed individual 
        in relation to the plan.
          (9) Applicable state authority.--The term 
        ``applicable State authority'' means, with respect to a 
        health insurance issuer in a State, the State insurance 
        commissioner or official or officials designated by the 
        State to enforce the requirements of title XXVII of the 
        Public Health Service Act for the State involved with 
        respect to such issuer.
          (10) Qualified actuary.--The term ``qualified 
        actuary'' means an individual who is a member of the 
        American Academy of Actuaries.
          (11) Affiliated member.--The term ``affiliated 
        member'' means, in connection with a sponsor--
                  (A) a person who is otherwise eligible to be 
                a member of the sponsor but who elects an 
                affiliated status with the sponsor,
                  (B) in the case of a sponsor with members 
                which consist of associations, a person who is 
                a member of any such association and elects an 
                affiliated status with the sponsor, or
                  (C) in the case of an association health plan 
                in existence on the date of the enactment of 
                the Small Business Health Fairness Act of 2005, 
                a person eligible to be a member of the sponsor 
                or one of its member associations.
          (12) Large employer.--The term ``large employer'' 
        means, in connection with a group health plan with 
        respect to a plan year, an employer who employed an 
        average of at least 51 employees on business days 
        during the preceding calendar year and who employs at 
        least 2 employees on the first day of the plan year.
          (13) Small employer.--The term ``small employer'' 
        means, in connection with a group health plan with 
        respect to a plan year, an employer who is not a large 
        employer.
  (b) Rules of Construction.--
          (1) Employers and employees.--For purposes of 
        determining whether a plan, fund, or program is an 
        employee welfare benefit plan which is an association 
        health plan, and for purposes of applying this title in 
        connection with such plan, fund, or program so 
        determined to be such an employee welfare benefit 
        plan--
                  (A) in the case of a partnership, the term 
                ``employer'' (as defined in section 3(5)) 
                includes the partnership in relation to the 
                partners, and the term ``employee'' (as defined 
                in section 3(6)) includes any partner in 
                relation to the partnership; and
                  (B) in the case of a self-employed 
                individual, the term ``employer'' (as defined 
                in section 3(5)) and the term ``employee'' (as 
                defined in section 3(6)) shall include such 
                individual.
          (2) Plans, funds, and programs treated as employee 
        welfare benefit plans.--In the case of any plan, fund, 
        or program which was established or is maintained for 
        the purpose of providing medical care (through the 
        purchase of insurance or otherwise) for employees (or 
        their dependents) covered thereunder and which 
        demonstrates to the Secretary that all requirements for 
        certification under this part would be met with respect 
        to such plan, fund, or program if such plan, fund, or 
        program were a group health plan, such plan, fund, or 
        program shall be treated for purposes of this title as 
        an employee welfare benefit plan on and after the date 
        of such demonstration.

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