Small-employer co-ops pick up speed

Small-employer co-ops pick up speed – health plan cooperatives

Rick Curtis

Offering the combined advantages of pooled purchasing and employee choice, health plan cooperatives are taking off

In late 1984, Health Choice in Portland, Ore., developed the nation s first small-employer health plan purchasing cooperative (HPC). A spin-off of a county Medicaid demonstration, the not-for-profit co-op gave employees a choice of four HMOs offering standardized benefits–an opportunity unheard of for small firms at the time. But it never took off. After a year-and-a-half, enrollment hadn’t broken 1,000, far too little to cover administrative costs.

The reasons for its failure? For one thing, the co-op’s initial benefit package proved too expensive for many small employers. For another, the organizers tried at first to reach prospective members without the help of agents. On top of that, the HPC lacked a fee-for-service plan, which many small employers preferred.

Fast forward to mid-1996, and zoom in on Associated Oregon Industries (AOI), which is on the brink of launching the country’s newest HPC. Highly regarded by the business community, AOI will offer affordable benefits marketed exclusively through agents and brokers and include options that extend to out-of-network providers. Little wonder that we expect it to fare far better than its long-ago predecessor.

Large employers’ success in curtailing costs has made it clear that purchasing cooperatives have much to offer small firms, which have had little chance to contract for defined panels of efficient physicians while offering their employees a choice. Nor have point-of-service plans been a viable solution, since many workers in the nation’s smallest companies can’t afford the higher cost-sharing and substantial balance-billing that comes with out-of-network care. That’s where HPCs come in and why they’re taking root.

A spate of initiatives followed the launch of the Health Insurance Plan of California in 1993, with co-ops cropping up in a variety of markets nationwide. In addition to those detailed in the table on pages 32 and 33, private HPCs are being developed in at least eight states, including Iowa, Illinois, Montana, Oregon and Texas. At the same time, enrollment in other co-ops has rapidly taken off.

Colorado’s Cooperative for Health Insurance Purchasing (CHIP), for example, exceeded its first-year projection of 500 employers and 10,000 covered lives in only six months of operation. Health Connections, the Connecticut Business and Industry Association’s HPC, covered 45,000 lives a year-and-a-half after its inception.

The Health Insurance Plan of California had an enrollment of 40,000 soon after its launch, in part because its rates were about 15 percent below prevailing small-employer prices. The staff of the California group attributes its success to a combination of tough negotiating, stiff competition for enrollees in a price-sensitive, individual-choice environment and insurance market reform implemented just as the co-op got started. Its enrollment now exceeds 100,000, and its HMO rates have declined for the fourth year in a row.

In addition to such market-specific factors, HPCs’ widespread appeal is not hard to understand: They combine the advantages of pooled purchasing and employee choice, directly represent purchasers and require every plan to offer the same standardized benefits. But, unlike other multiple small-employer arrangements, HPCs do not bear insurance risk, pay individual providers or manage care.

INSURANCE REFORM IS CRUCIAL

While small-employer co-ops are intended to harness private market forces, state legislation created the supportive environment for the initial wave of HPCs. As the map above indicates, the construct varies. The California and Kentucky co-ops are state-run, for instance, while Florida and North Carolina charter exclusive regional organizations and Iowa and Colorado set requirements for state certification of private purchasing cooperatives. The states shown as having a “compatible” environment guarantee small employers access to health plans and sharply limit rate variations based on health.

Small-group insurance reform–also addressed in the federal Kennedy-Kassebaum bill now in negotiation–is crucial to the success of purchasing co-ops and their ability to promote competition based on both quality and cost. Because of the limited risk-spreading in small-employer groups, in any given year the burden is likely to fall heavily only on certain members. Without adequate reforms, health plans that devote their resources to providing value are often outflanked by those that spend heavily on marketing, underwriting and pricing aimed at attracting low-risk groups.

In states that allow carriers a wide variation in small-employer premiums depending on health status or claims experience, a consumer-choice model HPC is extremely difficult to implement. That may be the most important lesson to be learned from the experience of the Texas Insurance Purchasing Alliance, which was determined to avoid becoming a high-risk dumping ground. TIPA not only found assessing the risks of each applicant group and adjusting plans’ prices quite cumbersome, but it also discovered that carriers were reluctant to be involved and unlikely to offer competitive rates.

Other equally poor options for a HPC: Allowing each plan it offers to assess the risks of each small employer and set prices accordingly, and setting itself up as the only source of small-employer coverage that offers the same price across-the-board. The former is expensive and precludes consumer-friendly price comparisons, and the latter invites the kind of risk-selection death spiral that befell several Blue Cross-Blue Shield plans. Employer groups like one in Milwaukee have shelved plans for HPCs because inadequate state insurance reform would have forced them into such bad choices.

A HPC would be at a severe disadvantage, too, if it guaranteed issue of all its plans to all small-employer applicants while its competition only had to guarantee one or two state-specific benefit packages and could underwrite any other product. That’s the conundrum created by the state law establishing North Carolina’s Caroliance. Not surprisingly, Caroliance administrators were forced to accept high (noncompetitive) rates and had only 1,000 covered lives after seven months of operation.

LEVELING THE PLAYING FIELD

Even when state regulation is ideal, employee choice can exacerbate the potential for risk selection among competing health plans within a purchasing co-op. While standardized benefits level the playing field, offering a PPO alongside more tightly constrained HMO plans raises the possibility that the open-ended plans will be left with the higher risks. An employer-choice model, on the other hand, at least helps to ensure that some healthy workers enroll along with individuals at high risk.

HPCs have found a number of ways to address risk-selection concerns and to preserve employee choice, however. Perhaps the most promising is the risk-adjustment mechanism the California cooperative developed with support from a Robert Wood Johnson Foundation grant. To determine the relative risk profile of each plan’s enrollees, the co-op collects information on inpatient medical diagnoses as well as demographic characteristics of enrollees. Funds are collected from the plans with an enrolled population with a low-risk profile and paid to the plans with disproportionately high risk. The first-year experience in the California purchasing group confirms that a practical way to address risk differences is indeed possible.

Risk adjustment in the small-employer market has another important purpose: By reducing plans’ ability to compete on the basis of risk, it drives competition based on value. In fact, it can provide the incentives plans need to develop innovations such as centers for excellence, knowing they won’t be penalized for treating high-cost conditions. The problem is, risk adjustment is a tough and expensive undertaking for a fledgling HPC. Health plans are also likely to balk at the burden.

The California co-op has found another way to control risk selection and encourage value-based competition: Design sales compensation so that agents and brokers earn the same commission regardless of an employee’s choice. A HPC can also ask each employer to select the benefit level or type of plan (for example, an HMO vs. a PPO) while the employees choose among plans of that kind. Colorado’s new CHIP has adopted this approach, which prevents healthier and sicker employees from segregating themselves into different types of plans.

THE DIFFERENCE SIZE MAKES

A HPC that combines large and small employers offers advantages to both groups, but, as with risk selection, designing an attractive product is difficult. Here, too, CHIP is one of several co-ops that’s stepped up to the challenge.

The Colorado co-op has different pricing approaches to address risk issues for three groups: small (up to 50 employees), medium (51 to 200 employees) and large (over 200 workers). Up and running since last fall, CHIP is already highly successful in the small-employer market, but participation has been modest by medium-sized firms. And bigger companies apparently have been unimpressed by health plan bids under its large-employer pricing strategy, which allows each participating plan to vary its (age-adjusted) rates for any given employer.

To attract big firms, CHIP executives say, they will likely change this component in the near future. They might try a method that a Topeka, Kan., HPC used with excellent results: It garnered highly competitive rates for its large-employer members by adopting a one-price-for-all-comers (with demographic adjustments only) model.

The Community Health Purchasing Corp. in Des Moines, Iowa, uses a different approach. The co-op–which will phase in fully insured plans for small employers next year has contracts with three integrated systems to provide coverage to larger employers. Most of these big firms purchase health coverage on a self-insured “target budget” basis copied from the model being piloted by Minnesota’s Buyers’ Health Care Action Group. If the claims target is exceeded, administrative payment to the integrated care systems is reduced.

BOOSTING CONSUMER CHOICE

Small employers have more to gain than their larger counterparts from participation in a health purchasing cooperative, especially when it comes to consumer choice. Without a co-op, small firms wishing to offer employees a selection of plans face significant complications. For one thing, carriers typically will not allow a small firm to offer competing plans. A more obvious problem is the administrative burden.

When small employers contract with single carriers, the carrier generally performs the full range of administrative functions, including enrollment, billing and general customer service. For many small firms, selecting, contracting and interacting with one carrier’s billing and enrollment process is a challenge, never mind the difficulty of dealing with a number of plans. HPCs streamline the process by consolidating the enrollment, billing and premium collection functions and then giving their member employer a single bill.

Helping individuals maintain a relationship with their personal physicians is at the heart of employee choice and employer participation in a purchasing co-op, and new, low-cost technology is making that easier to do. PC-based software developed for Florida’s Community Health Purchasing Alliances (CHPAs) and an on-line system developed by Health Partners in Minneapolis, for example, allow employees to easily identify which participating health plans Cor group practices) include their doctors. Rather than wading through separate directories for each participating plan, an enrollee can simply ask the computer system which plans include, say, the pediatrician, gynecologist and general practitioner his or her family members prefer.

MARKETING MATTERS

One of the great truisms of the business world is that a bad product can be successfully marketed but even the best product will fail if it is not marketed well. HPCs are no exception. “Field of Dreams” notwithstanding, building an ideal ballpark does not ensure that the players will come.

Small employers typically have little time or resources to negotiate the health insurance system on their own, so the vast majority rely heavily on agents. The Long Island Association Health Alliance, a private health plan cooperative in New York, learned this the hard way. Its initial intent was to sell directly to employers. After suffering through very slow enrollment growth, the Alliance developed successful partnerships with agents. California’s HPC took another tack: allowing employers to choose whether or not to use–and pay for the services of an agent or broker.

The result? Roughly two-thirds of its enrollees have come through agents. But the co-op’s representatives say the knowledge that employers could bypass them (and their commission) stopped many agents from actively promoting their product. They also discovered that the time and expense involved in direct enrollment exceeded their expectations. So they took away the option. As of July 1, all new enrollees pay the same premiums, which include agent commissions.

By a wide margin, the Connecticut Business and Industry Association (CBIA) has achieved the most rapid market penetration of any HPC to date. In a state with one-tenth the population of California, its enrollment approached 50,000 after less than a year-and-a-half of operation. While Health Connections, CBIA’s strong offering, and the association’s proven track record in serving employers clearly helped, CBIA officials attribute much of their success to their close relationship with the agent community. Like other successful cooperatives, CBIA’s staff train, certify and pay agents to sell their product. Following a similar strategy, Colorado’s CHIP offers credits toward the state’s agent certification requirements.

Here, too, state rules and regulations can help or hinder. Florida’s state-chartered Community Health Purchasing Alliances, for example, have been shackled by a statute that requires agent compensation to be set–and directly paid–exclusively by health plans. Such a regulation, which means different plans pay different commissions, clearly makes competition based on value and informed choice hard to achieve. The success of Florida’s CHPAs–after two years their collectively enrollment exceeds 76,000–attests to their hard work and the attractiveness of the one-stop shopping and employee-choice option they offer the state’s small employers. But enrollment would likely be much higher without the statutory constraints.

ON THE NATIONAL FRONT

The Kennedy-Kassebaum bill includes measures to assure that private HPCs meeting certain criteria can be implemented. The bill would allow them to negotiate price reductions even in states where community rating laws would otherwise preclude their doing so. However, HPCs would be authorized to negotiate savings from health plan efficiencies–but not from differences in risk status. The Senate bill would also preempt so-called “fictitious group” laws, state provisions that bar employers from coming together for the sole purpose of purchasing health insurance.

While the House version of the health reform bill shares the Senate’s intent of giving small employers the kinds of deals their larger counterparts enjoy, its approach is fundamentally different: The House would simply provide broad ERISA preemption of state insurance law for some multiple-employer arrangements. Among other things, that would mean these small-employer groups would not be subject to state-mandated coverage for specified services and providers, insurance premium taxes and anti-managed care stipulations requiring freedom of choice of providers.

Regardless of the outcome of this year’s federal legislation, both the impetus for its adoption and the concerns about specific provisions will doubtless generate debate and future laws. Small employers that want to provide health insurance have long been frustrated by a system that relegates them to the losing end of the cost-shift chain. Many experts and policymakers intent on solving this problem also want to ensure that employees get the health insurance protection they need. These forces portend both improved insurance market rules and continued growth of HPCs around the country.

Rick Curtis is president and Kevin Haugh is a principal of the Institute for Health Policy Solutions in Washington, D.C., a research group that specializes in assisting health purchasing cooperatives.

COPYRIGHT 1996 A Thomson Healthcare Company

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