Last July California took health-care reform one step further than any other state, with a program that anticipates the Clinton health-care proposal. The Health Insurance Plan of California (HIPC) is a small-business health-insurance-purchasing cooperative (also referred to as an HIPC, just to confuse things). Since states are moving fast on this issue, you may see something similar in your neighborhood before you see national health care.

Large companies all over the country have been forming private purchasing alliances for years, and small companies have recently followed suit. (See "Buying Coverage as a Team," this column, April, [Article link].) Unlike those plans, California's HIPC is open to all small businesses. Under the Clinton plan, companies with as many as 5,000 employees would join federally sponsored cooperatives.

By uniting in the HIPC, California's small companies have spread their risk and negotiated better rates from insurers. Managed Care Innovations, in Seal Beach, Calif., was one of the first to join the collective. Before certain state reforms were enacted, the company, which provides managed-care services to independent medical groups, had been unable to get medical coverage for its 49 eligible employees. Two carriers made bids as a courtesy, but Managed Care's coverage through the HIPC comes in $37,000 cheaper annually than what those carriers would have charged.

Companies that join the California HIPC agree to pay at least 50% of its lowest-cost plan. Each of their employees may choose from any of 18 plans currently offered. If employees opt for a more expensive plan, they pay the difference unless their employer makes other arrangements, so there's some incentive for workers to choose the cheapest plan. That helps pressure carriers to keep costs low.

The alliance would be impossible without other state reforms. For example, California now requires insurers to guarantee that any business with 5 to 50 employees -- inside or outside the HIPC -- will have access. It also limits insurers' underwriting adjustments to 20% above or below their standard rate. The HIPC conducts no underwriting and guarantees a standard rate to all, making it an attractive alternative. Other reforms limit waiting periods for preexisting conditions to six months and allow employees who change jobs to move from one health plan to another without a new waiting period.

Without those strictures, California's HIPC would become a prohibitively expensive dumping ground for bad risks. With them, California has cultivated a competitive market in which the HIPC could succeed; the collective has negotiated very good rates. Since July 1, 2,100 small businesses have joined the California HIPC, representing 36,000 people -- 22,000 of them employees, the rest dependents (about 15% of them previously uninsured).

* * *