Issue Brief Montana Issue Brief #3 Feb. 2004 (Final) State Experiences in Developing Purchasing Pools Overview In general, purchasing pools have been Some states have supported the development characterized by: a standardized benefit set; of purchasing pools to increase health health insurance contracts with at least two insurance offer rates among small managed care plans or insurers; competitive employers. Small employers can gain contract bidding process based on price, greater bargaining power in the market for quality, or access; and centrally health insurance, negotiate lower rates, and administered enrollment and billing achieve administrative cost savings by processes. purchasing insurance as a larger group. Ideally, purchasing pools can expand the However, states have encountered some range of health plan options offered to formidable obstacles in the development and employees, and provide for investments in implementation of small-group purchasing technology and quality monitoring activities pools. There are only about 20 small-group that were not possible for small employers cooperatives or alliances, providing individually. The success of large employers coverage for a total of roughly one million in instituting purchasing pools has fueled employees and dependents across the U.S.2 enthusiasm for this concept among states In particular, states have had limited success with low rates of employer-sponsored in increasing the number of individuals with insurance.1 health insurance coverage, making insurance more affordable, gaining substantial In this issue brief, we discuss the membership, and achieving substantial effectiveness of state purchasing pools. We administrative cost savings for members. also outline barriers to successful outcomes, Barriers to the Success of Purchasing with a special focus on obstacles unique to Pools Montana. Finally, using the lessons learned in other states, we map out various ways States have encountered several barriers to Montana can encourage the development of success in pooling health care expenditure viable purchasing pools for small employers risk among employers. Perhaps most and their employees. elusive has been overcoming problems associated with adverse selection. Adverse Effectiveness of Purchasing Pools selection occurs when healthier individuals or groups leave the pool and sicker Several states developed small employer individuals remain, driving up the cost. purchasing pools as part of a broader Pooling risk among employers should have movement to reform the small group health the effect of making premiums more insurance market in the mid-1990s. Most affordable for small groups that contain pools to date have been voluntary, meaning individuals who utilize health care services that small employers in the state have the to a greater extent than others. Yet because option, but are not mandated, to participate. 1 these pools are voluntary, lower cost groups early years of implementation, but have have the incentive to look outside of the been unable to retain the participation of pool for lower cost offerings. As more and enough health plans to sustain needed more low-cost groups leave the pool, the enrollment in the long term.3 remaining group becomes more costly. To be economically viable and to avoid adverse Along with the general challenges described selection, pools must use the same risk- above, a frontier state like Montana—with rating mechanisms inside the pool for its low population density and a predominantly members as is used in the general market rural population—faces additional barriers outside of the pool. to developing a viable purchasing pool. Among the key factors contributing to Unfortunately, pools that implement such Montana’s high rate of uninsurance are a rating of risk also have more difficulty prevalence of small, independent businesses, demonstrating administrative cost savings. large numbers of part-time workers, and low Many of the costs inherent in serving small wages. The majority of employed groups continue to exist despite the shared Montanans lacking coverage (56%) were organization. For example, many plans, employed by small employers with ten or struggling to reach the size needed to begin fewer employees.4 achieving administrative efficiency, have required subsidies during start-up as well as A large proportion of Montana’s small initial operation due to unexpected businesses currently not offering insurance marketing expenditures. Some pools have (40%) would likely participate in a attempted to gain savings by eliminating the purchasing pool, according to the results of role of sales brokers, but as a result, brokers the 2003 Montana Employer Survey. Yet have actively marketed against pools. Small with few insurance carriers to write policies employers depend heavily on brokers as a for small-employer purchasing pools, low source of information, and successful pools Health Maintenance Organization (HMO) have learned that they need to work with penetration, and limited competition in the these agents in order to meet growth health care market in general, Montana has objectives. thus far had little success in promoting the concept. While the 1995 Montana Purchasing pools have also had mixed Legislature authorized group purchasing success in their ability to offer employers a cooperatives, only one coalition of large choice of health plans. Pools must employers has been formed and its functions demonstrate strong enrollment growth and have varied over time. market share to attract the attention of health plans, and at the same time offer a choice of Ways States Can Encourage and Sustain health plans to be attractive to employers. Purchasing Pools With over 150,000 enrollees, California’s Rising uninsurance rates and growing PacAdvantage is an example of a pool that concern about employers’ ability to offer has been successful in both adding health coverage in the current economic climate plans and continuing to build enrollment. have prompted states to look again at the However, a number of state-sponsored potential of purchasing pools to address pools—for example, pools in Florida, issues of access for small group employers. Colorado, North Carolina, Colorado, and Given the limited success of these initiatives Texas—have increased enrollment in their in boosting employer offer rates, 2 policymakers have increasingly looked at business community who have the various ways states could encourage the requisite expertise in insurance sales and development of pools through direct marketing. In states like Colorado and subsidies or tax incentives. Some analysts California, large businesses have have argued that because the benefits of championed the purchasing pool model these pools accrue to society as a whole— as a solution for small employers. rather than to individuals or their employers alone—public subsidies are warranted.5 • Subsidize initial development, marketing, and administrative costs. States have experimented with various Start-up funds must be adequate to build mechanisms to help small-employer the infrastructure needed to administer purchasing pools get enough enrollees to the plans, and to perform necessary remain viable. Generally speaking, these marketing activities so that small strategies fall into two major categories: (1) employers are aware of the option. Some those that reduce financial risk, including states establish and fund pools as a the risk of adverse selection for participating division of state government or as a health plans, and (2) those that reduce costs quasi-governmental body. Other states to employers or to employees that work collaboratively with businesses to participate in the pool. Below, we provide establish nonprofit entities. While fiscal descriptions of these strategies, as well as support from some sponsoring source is examples of states experimenting with essential for the initial development them.6,7 phase, it is not sufficient to guarantee success. A favorable insurance market • Provide adequate sponsorship. climate, for example, is equally Success in the marketplace is dependent important. on getting buy-in of all the players involved, including employers, health • Provide risk sharing for high cost plans, brokers, and state regulatory cases. Minnesota has recently authorized agencies. Sponsorship by an appropriate a pilot project for state-subsidized stop entity to begin the momentum and loss coverage for rural purchasing provide start-up funds is needed. alliances established to serve businesses Successful examples of sponsorship and farm families with 1-10 employees. include: plans started by state For employers who have not offered government, either through a insurance for at least 12 months, the government agency or separate quasi- state will provide partial reinsurance for governmental body (such as claims between $30,000-$100,000.8 PacAdvantage); plans initiated as public- New York also has a similar program of private partnerships such as New York subsidizing high cost cases. City’s HealthPass Purchasing Alliance; and plans sponsored by business • Exempt purchasing pools from benefit coalitions such as the Connecticut mandates. This strategy is aimed at Business and Industry Association enabling purchasing pools to offer lower (CBIA), and Colorado’s Cooperative for rates and encourage employers not Health Insurance Purchasing (CHIP). In currently providing health benefits to some cases, start-up purchasing pools begin providing them. This vehicle have borrowed executives from the should be used with some caution, as it 3 may attract a disproportionate share of bid for state employees also offer their employers with high-risk employees products to the purchasing pool. An who are unable to obtain insurance at a example of this strategy can be found in reasonable rate elsewhere. recent legislation in Florida.10 • Provide individual tax credits to low- In Summary income workers. Because the size of a Given the experience of other states in tax subsidy will affect the number of developing and sustaining purchasing pools, individuals who choose to purchase and the unique barriers faced by a frontier coverage, this strategy may be more state like Montana, it is unlikely that this effective if federal as well as state tax policy strategy alone will result in credits are available. significant progress toward helping residents access affordable health insurance. As part • Require plans that participate in the of a broader health care reform agenda, or if small group market also join the coupled with other initiatives such as small purchasing pool. A variant on this employer tax incentives, further efforts and strategy is to designate a purchasing investments in the development purchasing pools as the sole vehicle through which pools may be worthwhile. Because previous health plans can offer coverage to small efforts in Montana to initiate group health group employers. New Jersey has care purchasing cooperatives have had provided a precedent for this type of limited success, the discussion of new legislation, requiring health plans that efforts to develop small-employer sell insurance in the state to also purchasing pools should include consider: participate in the individual insurance possible state investments in the pools; market or absorb a portion of the losses employer mandates or incentives; individual incurred by insurers that do serve this or small employer tax credits; and combined market.9 state purchasing group strategies. • Combine purchasing pool enrollment The opinions expressed in these briefs with other state purchasing groups represent those of the authors. Any such as state government employees. questions or comments are welcome and This model has been examined by states should be directed to shadac@umn.edu. as a means to cover various uninsured groups. Kentucky enacted, but later withdrew, this type of pooling mechanism. The Governor of New Mexico also recently proposed a comprehensive health plan for employees and retirees of state governments, local units of government, and universities. States should exercise caution with this option because if the pool attracts higher risk groups, the rates for state employees could increase substantially. Another option is to requiring that health plans that wish to 4 References 1 One successful large-group employer pool is the State of California’s California Public Employee Retirement System (CalPERS) which offers health insurance to state employees and retirees. As of 1999, CalPERS had over 1 million enrollees. Other examples include the Federal Employee Health Benefits Plan (FEHBP), the Pacific Business Group on Health Negotiating Alliance (California), and the Buyers Health Care Action Group (Minnesota). 2 Stephen H. Long and M. Susan Marquis. “Pooled Purchasing: Who Are the Players?” Health Affairs, Volume 18 (July/August 1999), pp. 105-111. 3 Elliot K. Wicks, Mark A. Hall and Jack A. Meyer. “Barriers to Small-Group Purchasing Cooperatives.” Economic and Social Research Institute, March 2000. Also Elliot K. Wicks, “Health Insurance Purchasing Cooperatives.” The Commonwealth Fund, November 2002. 4 “Final Report on 2003 Household and Employer Survey”, University of Montana. 5 Laura Tollen and Robert M. Crane. “The Role of Health Care Purchasing Pools in Improving the Functioning of the Small Group and Individual Markets.” Kaiser Permanente, March 2001. 6 Wicks et al., 2000, pp. 130-135. 7 Rick Curtis, Rafe Forland, and Ed Neuschler. “The Potential for a Small-Employer Purchasing Pool in Wisconsin: Issues and Options for Overcoming Barriers to the Development fo the Private Employer Health Care Coverage Program.” Institute for Health Policy Solutions, January 2003, pp. 7-13. 8 Minnesota Session Laws 2003, Chapter 20—House File #266. 9 Wicks et al., 2000, p. 133. 10 Ibid., p. 135. 5