Are Purchasing Pools the Answer to Small Employers' Health Insurance Needs?
By James M. Pool and Lauren C. DeMoss, Maynard, Cooper & Gale, P.C., Birmingham, AL
As the cost of health insurance continues to rise and small businesses struggle to maintain health insurance benefits for their employees, several states have explored ways to assist small employers with maintaining health insurance. One solution that has been contemplated and attempted by approximately twenty states (and perhaps by many private insurers) is the creation of purchasing pools. Although pooling health insurance risk is not a new idea (some states attempted pooling in the 1980s and 1990s), it is a concept that is resurfacing as both the federal and state governments grapple with healthcare reform. This article will provide an overview of purchasing pools and will provide examples of purchasing pools in a few states.
Group purchasing arrangements, or “purchasing pools,” collectively purchase insurance benefits for employers to offer to their employees. Typically established by either state legislation or an organized cooperative of small employers through a private insurance company, purchasing pools primarily aim to provide small employers with advantages similar to those realized by large employers when offering health insurance to employees. Specifically, purchasing pools are endorsed as a way by which small employers can (i) reduce the cost of and large fluctuations in health insurance premiums, (ii) increase choice of plans, (iii) better negotiate rates and benefits, (iv) simplify their search for providers, (v) potentially provide a benefit that employees may take with them to a new employer, and (vi) provide better assistance with claim disputes.
Purchasing pools can be governmental, quasi-governmental or private entities:
(i) Governmental purchasing pools are created and managed by the state government. Through the legislative details of the arrangement, a state is able to maintain a high degree of control of such purely governmental entities.
(ii) Quasi-governmental purchasing pools are entities in which a state agency is responsible for overseeing a public-private arrangement. In this type of purchasing pool, the state agency typically handles management of the pool, including the negotiation, marketing and enrollment functions. Some believe that this type of arrangement better handles problems with private entities, such as insolvency and fraud. Conversely, quasi-governmental arrangements may have to rely more on state funding than would a purely private arrangement.
(iii) Privately-operated purchasing pools can be either entirely independent of insurance companies offering coverage, or owned by or affiliated with an insurance company.
COSTS AND FUNDING
The drafting, sponsorship and enactment of legislation, the establishment of an entity to administer the program, and any continuing oversight functions delegated to that entity appear to be the state’s primary costs associated with the development of a state-sponsored purchasing pool. If the program is state-created but privately insured, other administrative costs, such as marketing materials, claims processing and employer/employee education, are often borne by the private insurer or broker.
Purchasing pools typically require little state funding after the initial administrative costs, unless the state intends to (i) subsidize the program, and (ii) create employer incentives and/or employee assistance payments to help both employers and their employees pay the costs of coverage in hopes of obtaining the affordability desired under the program. The following are various funding sources used by states or entities that have established purchasing pools:
(i) employer contributions. For example, in Arkansas, employers are responsible for fifty percent (50%) of the monthly premium payment;
(ii) employee contributions. For example, in New Mexico, employee contributions are required of employees participating in the pool;
(iii) tax revenues earmarked for the program. For example, Montana’s $1.00 per cigarette package sold funds the program; and
(iv) state or community subsidies. For example, a community-based program in Michigan uses community subsidies for forty percent (40%) of the program’s cost.
EXAMPLES OF PURCHASING POOLS
In Arkansas, the Small Employer Health Insurance Purchasing Group Act of 2001 (the “Arkansas Act”) allows cities, counties and small employers ( i.e., employers with fewer than five hundred employees) to form health insurance purchasing pools for their employees. The Arkansas Act allows small employers to offer a broader range of options to purchasing group participants that includes all, some, or none of the Arkansas coverage requirements and contains some actuarial safeguards to diminish the potential for anti-selection. (If the insurance coverage does not meet the state required mandates for coverage, the purchasing pool must provide enrollees with advanced notice that the insurance does not meet state requirements. )
The State and Public School Life and Health Insurance Board (the “Board”) or any insurance carrier approved by the Board may offer a purchasing pool health benefit plan. The Board maintains broad authority with respect to the establishment of a purchasing pool and generally may adopt rules necessary to implement the program. More specifically, the Board is responsible for (i) establishing new insurance purchasing pools for cities, counties and small employers, (ii) requiring contracts between the plan and cities, counties and smaller employers to remain in effect for at least one year, (iii) establishing underwriting restrictions to ensure financial stability of the purchasing pools, (iv) determining the benefits to be covered by the pool, and (v) setting rates concordant with private marketplace practices. Pursuant to the Arkansas Act, employers participating in the purchasing pools are required to pay at least fifty percent (50%) of each employee’s premium for individual coverage.
A unique aspect of the Arkansas program is that the purchasing pools are community-based purchasing cooperatives for small businesses in that community. By using a community-based approach, the pools are better able to organize, monitor, and support smaller employers in their effort to secure more affordable insurance options for their employees. Further, the Arkansas legislature favored community-based pools because it allowed tighter controls on enrollment that could more easily address adverse-risk selection problems.
In 2005, New Mexico passed the Small Employer Insurance Program (“SEIP”) as a part of the Insure New Mexico! initiative. Established by the Health Insurance Alliance Act, SEIP is for small employers and non-profit corporations with fifty or fewer employees “if the small employer has not offered health care coverage to persons and dependents eligible through a small employer for a period of at least twelve months prior to enrollment in the coverage offered pursuant to the group benefits act.” SEIP offers a comprehensive health insurance benefits package with an annual claims limit of $100,000 per enrollee, and benefits include primary and specialty care, inpatient and outpatient hospitalization, pharmacy, lab, X-ray, physical, occupational, speech therapy, behavioral health and substance abuse services.
Even though SEIP was established by the New Mexico General Services Department and its director of risk management (collectively, the “Department”), SEIP is administered by Blue Cross Blue Shield of New Mexico, and the pool is funded by premium contributions from both participating employers and employees.
SEIP mandates that the Department develop and maintain the following administrative procedures: (i) program design standards, including the types, extent, nature and description of coverage, specific eligibility and enrollment rules, the deductibles, the premium rates, the amount of reserves necessary to be retained, and all other matters reasonably necessary to carry on or administer the program; (ii) procurement of contracts with health care providers, (iii) dissemination of information about the program to eligible small employers and their employees; (vi) orientation of new employees and continued communication with ongoing employees in the program; and (v) record keeping procedures, including insurance files, claim files, and files for eligible participants.
In order to help achieve the purchasing pool’s intended effect of lower premiums by pooling risk, the New Mexico program uniquely combines SEIP with its high-risk insurance pool, the New Mexico Medical Insurance Pool (“NMMIP”). High-risk members of SEIP will become members of NMMIP, and, since the programs use the same administrator, individuals will not know from which program they are drawing coverage.
As of December 2006, over 4600 individuals were participating in SEIP. By January 1, 2010, the Department, in coordination with the superintendent and the New Mexico Health Insurance Alliance, is required to coordinate the promulgation of a rule to replace SEIP to allow participating small employers and persons and dependents eligible for SEIP to participate in the coverage afforded pursuant to the Health Insurance Alliance Act.
Originally known as the Small Business Health Care Affordability Act of 2005, “Insure Montana” allows small businesses the option of (i) joining purchasing pools to obtain more affordable health insurance coverage for their employees, or (ii) realizing tax credits by providing employees with health insurance. In order to qualify for the purchasing pool program, the following criteria must be met: (i) t he employer has not provided employee health insurance in the past twenty-four months; (ii) the employer has a number of employees that meets the eligibility criteria established by the State Auditor’s Office (currently, between two and nine employees); (iii) the employer begins to provide health insurance through the new State Health Insurance Purchasing Pool or another qualified plan; and (iv) no employee is paid more than $75,000 per year (owner excluded). Blue Cross Blue Shield of Montana is the plan administrator, and there are standard and premium program choices. The program makes either employer incentive or employee assistance payments, which generally result in the employer paying only twenty-five percent (25%) of the monthly premium. The program is funded by a tobacco tax and by state allocations of $13 million combined for 2006 and 2007 and $20 million combined for 2008 and 2009.
As of the end of 2007, nearly 730 employers and 5,310 individuals were enrolled in the program. As of mid-2008, all available slots for the program were filled due to limited funding. Even though applications continue to be accepted, over five hundred businesses have been placed on a waiting list in the order that applications were received. Insure Montana’s website notes that additional funding has been requested and will be determined by state legislators during 2009 legislative session.
California ’s purchasing pool alliance, the PacAdvantage Health Plan, allowed small employers and self-employed individuals to purchase health insurance through the cooperative. Created as the Health Insurance Plan of California in 1992, PacAdvantage was an independent, non-profit voluntary purchasing pool for small businesses with two to fifty employees.
Perhaps once considered a successful purchasing pool initiative, PacAdvantage was forced to cease operations on December 31, 2006. Along with other participating health plans, Blue Shield of California notified PacAdvantage that it could no longer participate after December 31, 2006, due to its financial losses in the program. PacAdvantage tried, but was unable to reach an arrangement that would allow for continued participation of several health plans. The purpose of PacAdvantage was to provide different plan choices for participating small employers, and, once choices became limited, the program lost its operational purpose.
Theoretically, health insurance pools can achieve more widespread coverage and lower cost by pooling risk; however, as evidenced in unsuccessful purchasing pools, simply establishing or designating a pool does not achieve the anticipated benefits. The program must be properly designed, and success likely will depend on the state insurance profile, whether the program is statewide or community based, the eligibility requirements and the funding allocations.
The ABA Health eSource is distributed automatically to members of the ABA Health Law Section . Please feel free to forward it! Non-members may also sign up to receive the ABA Health eSource.