Improving the Benefit Experience

The Exclusion of Sole Proprietors from Group Insurance

The challenges of running a small business are numerous, but obtaining affordable health care is an especially complex and restrictive one. Laws governing the health plan markets a company can access are obtuse, in a constant state of flux, and less than hospitable to the small business. These laws are also inexplicably inimical to the sole proprietor, forcing self-employed entrepreneurs into the more expensive—and usually lower quality—individual health plan market.

Unlike most products and services Americans purchase, health insurance is separated into markets that can’t be accessed by everyone equally. The markets are basically split into the individual and family plan market, the small group plan market, and the large group plan market. As would be expected for anything sold in bulk, the large group plans offer the most affordable, comprehensive, and full-featured packages, as the companies offering them are competing for large contracts that yield significant amounts of cash, and cost less to administer. A large pool of people purchasing insurance as a group represents a more predictable percentage of healthy payers who will not draw benefits, thereby increasing profitability for the insurer. As the number of people in the pool is reduced, the administrative costs increase and the predictability of the number of healthy payers—and thus profit—decreases. This is why insurers are willing to offer lower cost coverage with more flexible and comprehensive benefits to their large-group customers.

The cost differences between individual/family, small-group, and large-group plans are also affected by laws governing the price and benefits of those plans. In essence, large group plans are subject to fewer regulations, making them easier and cheaper to provide in compliance with the law, and more competitive with each other. Plans for small groups and individuals face more restrictive regulations, and are as a result more expensive, less competitive, and, counterintuitively, less tailored to particular customers’ preferences for coverage.

While the laws restricting access to the more advantageous large-group market are a handicap for the small business, they are especially punishing for the sole proprietor as well as the family business. While a small business is ostensibly a business with 1 – 50 employees for most states, many insurers and states do not consider the sole proprietor or the sole proprietor’s spouse to be employees of the business. (The Department of Labor has issued new regulations that allow a sole proprietor to count himself as his own employee, but these regulations are currently tied up in litigation.) Similarly, a business with only family employees (for example a family with a husband who is the business owner, wife, and three adult children running a bakery) covered by a single health plan, although having three (or five, depending on the status of the current regulations) employees, is classified as having only one employee where it concerns health care, since only one employee is purchasing a healthcare plan, albeit for his whole family. Such technicalities effectively exclude the sole proprietor and family business from accessing the small group insurance market, increasing the burden to their struggling business and limiting their coverage choices.

Many small employers have turned to consolidating with other small employers into large associations to access the advantageous large group market. The Affordable Care Act placed considerable restrictions on Association Health Plans, but an executive order from President Trump directed the government to expand small business accessibility to AHPs as well as short-term insurance and health reimbursement programs. The Department of Labor in response to this order issued its “final rule” on AHPs, which loosened restrictions on AHPs, allowing them to create more affordable, customized offerings tailored to the health needs of their clients. In response to this loosening of restrictions on AHPs by the DOL, a coalition of Democratic attorneys general from 11 states and the District of Columbia filed a lawsuit challenging these new DOL guidelines. The lawsuit argued that the intent of the DOL’s “final rule” was to undermine the ACA, and that it contradicted language in the Employee Retirement Security Act, seeking to have these new guidelines vacated. The court found that the DOL’s “final rule”, in opening access to AHPs to sole proprietors, violated ERISA’s prohibition against allowing sole proprietors to join associations to access group insurance. This judgement could be considered to be based in large part on language in ERISA focusing on a “relationship” between employer and employee, as well as the intent of the ACA to segregate sole proprietors, small employers, and large employers into distinct insurance markets.

Currently the DOL’s “final rule” has been remanded back to the DOL to either be rescinded, revised to comport with the court’s determination of its violation of ERISA and the ACA, or reconsidered in the remainder based on its severability (since the court did not rule on those other portions). The federal government could also appeal the court’s decision.

Effectively, this bars access to many associations for small businesses and sole proprietors, forcing them to purchase health insurance plans from the small group market or individual market. It also forces many existing associations to comply with the ACA’s restrictions on individual and small group insurance plans. In many cases, the result is higher prices and less choice for both the small employer and its employees, and the sole proprietor.

The question must be asked: How is this segregation of businesses in regards to health insurance fair or beneficial to the small business or sole proprietor? The answer, as is often the case with elaborate regulations purporting to protect employees, has more to do with political alignment and ambitions than beneficent intent. In a report issued in 2018, Avalere projected that over 4 million people enrolled in individual and small-group market plans would defect to more affordable AHPs. [1] Similarly, the Society of Actuaries predicted that up to 10 percent of individual market customers would switch to AHPs, and that this would result in claims in the individual ACA market rising by about 4 percent. [2] This is due to the likelihood that the ACA market would increasingly become more predominately populated by those with preexisting health issues, as healthier customers would choose lower-cost insurance options that didn’t offer as comprehensive coverage, or incorporated wellness programs which use rewards to incentivize healthy lifestyles. Protecting the ACA is largely a matter of partisan loyalty, and the emergence of lower-priced insurance plans catering to the healthy—including plans with actuarially fair pricing that take into consideration age, gender, occupation, and other non-health factors that predict a customer’s cost to the insurer—threaten the ACA’s ability to attract healthy customers to keep their plans solvent. If the ACA-compliant plans become financially impracticable, it would not bode well politically for its longstanding proponents. It is unfortunate that political allegiance to the ACA (not to mention the objective of some to implement the even more extreme single-payer model) is the force keeping small businesses and sole proprietors from accessing the same health care market available to large businesses. This is unfortunate for the small business, as access to this market would help level the playing field, increasing the viability and competitiveness of small businesses in addition to giving more power to small business employees to choose the same health insurance available to their fellow Americans working for Microsoft and Boeing.

[1] Avalere Health, "Association Health Plans: Projecting the Impact of the Proposed Rule," February 2018. [Online]. Available:
[2] The Society of Actuaries, "New Rules to Expand Association Health Plans," May 2018. [Online]. Available:

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