Association Health Plans are often marketed as a silver bullet for local municipalities, nonprofits, and consortiums of employers. “Join forces,” they’re told, “and your combined buying power will lower your costs.” From the halls of Congress to the states, the idea of tipping the scales of competition in favor of buyers for health benefits seems to be a logical policy solution to the rising cost of health care.
But in reality? That’s rarely how it plays out.
Here’s the problem: When you form a group of independent employers to purchase health insurance, you’re setting up a system destined to implode. Why? Because the healthiest players can — and eventually will — leave. It’s not personal — it’s economics.
Here’s a simplistic example: twenty employers join together to form a 500-employee pool. Eight groups are high-risk. The others are fairly healthy. Together, they have a stable cost for the first year, spreading risk across the large group of lives. Occasionally, the AHP will charge more to some groups based on their overall health and risk score. Regardless, this starts the “free-rider problem” within the AHP: the least healthy of the group are benefiting from the group’s collective goal – lower health benefit costs for themselves.
But eventually, the healthiest of those groups will be shown they could save $50 per employee per month by exiting the pool and buying it on their own. When faced with the prospect of saving tens of thousands of dollars, their reaction is natural: “I’m sorry, but I can buy it cheaper over here by myself. Sorry!” And they leave.
Mancur Olsen calls this the Collective Action Problem: Rational self-interest undermines group stability. AHPs depend on solidarity among the participating employers — but economic incentives lead each employer to defect once their risk is better priced elsewhere.
Now the average health risk of those who remain increases, and their costs go up. The people running the plan become desperate to get new lives, offering discounts to lure new healthy groups into the pool — however that strategy only lasts so long. Then the next healthiest groups leaves. And the next and the next… and so on. This is the prisoner’s dilemma within game theory: when a cooperative outcome is mutually beneficial, fear of disadvantage leads actors to defect. Employers jump ship to lower-cost options to “avoid being the last healthy group left holding the bag,” accelerating collapse. And eventually it does.
That’s exactly what’s happened — three times — in North Carolina over the last ten years, starting with the NC Association of County Commissioners plan back in the 2010’s, earlier this year with the collapse of NC League of Municipalities Health Benefit Trust, and most recently the announcement that the Medical Society of North Carolina’s health benefit plan would cease operations “voluntarily” at the end of 2026.
The story is similar around the country.
With the next wave of association health plans as “the solution” forming off the coast, policymakers in Washington and the states need to ask if this is best for the long-term. Allowing risk-based pricing brings cherry-picking[1] practices back into small group, driven by the idea that the best groups should get the lowest rate and competition… until your group is one of the unhealthy.
Employers should seriously question group-buying arrangements that lack transparency and provide long-term stability. In many cases, there’s no visibility into carrier contracts, claims costs, PBM revenue being generated and retained by the AHP’s operators, and very little disclosure about how much administrators, vendors or sponsors are making.
The entire model is based on volume, not long-term stability and value for patients. It’s about “more lives” at the beginning and being able to offer financial incentives to the healthiest groups to join. They are skimming the best groups out of the small group markets, growing the entire group, but not actually managing care more efficiently.
This is about short-term gain, not better outcomes for all.
Lower-quality pricing can temporarily win market share but is unsustainable without risk normalization. AHPs often start “cheap,” but only because they have not yet absorbed high-risk members. In the long run, rates spike and plans fail.
This outcome isn’t hypothetical – it’s been proven through economic theory and confirmed multiple times over the last forty years: MEWAs in the 1980s, the rise and fall of purchasing cooperatives in the 1990s and early 2000s, and the abuse of the small group market through cherry-picking the best risk into level-funded plans that has been happening since 2016.
Because when the healthy leave, it’s the sick who are left holding the bag.
David brings a unique perspective to this issue, dating back to his work with the North Carolina Health Purchasing Pool Board and Caroliance in the 1990s, and his current experience working with employers of all sizes on health plan analysis, management, and analytics as the Senior Vice President of eBen Benefits, a part of the Brown & Brown Team.
