Cheaper by the Dozen
Forget health-care reform. Small-business alliances have cut costs and improved coverage without it
Karen Meade-Bentlage, who owns a $4.6-million distributor of tanning equipment and supplies in Stratford, Conn., remembers the day one of her 18 employees came into her office and thanked her for the excellent health insurance the company had obtained through a small-business purchasing alliance. The employee had recently had a tumor removed, and the health-maintenance organization in which she'd enrolled through the alliance had borne most of the cost. The company's previous, fee-for-service insurer would have paid a much smaller portion of the charges, says Meade-Bentlage, if it had covered her treatment at all.
The 37-year-old entrepreneur decided to join the buying group last year after her former carrier handed her company, Future Industries of America, a 25% rate increase. In the alliance, which is sponsored by the Connecticut Business and Industry Association (CBIA), she paid 15% less than her previous insurance carrier would have charged her. This year her rate rose just slightly, while HMOs and preferred-provider organizations (PPOs) outside the alliance hiked small-group prices by 2% to 9%.
What most amazes Meade-Bentlage about the coalition is that it allows her workers to choose from among four managed-care plans offered by each of four major carriers -- more choices than the employees of most large corporations have. That virtually guarantees that each of them can find a network with his or her own doctor in it. The freedom of choice helped persuade five previously uninsured workers to get coverage, although the company pays only half of employees' premiums.
Future Industries of America is one of thousands of small businesses across the country that have benefited from the new crop of insurance-buying groups. Many of those voluntary alliances emerged or germinated at the same time as Clinton's national health-care-reform campaign. They survived the failure of that effort because they answered a genuine need among small employers for improved access to health insurance.
In the past three years, a dozen states -- including California, Florida, Texas, and Ohio -- have created or endorsed purchasing alliances. Partly as a result, a number of privately sponsored coalitions have sprung up in those and other states. In the regions where they've taken root, alliances have helped hold down costs in the entire small-group insurance market.
Harnessing the collective buying power of small businesses is not new. Trade associations and chambers of commerce have long been entering contracts with traditional insurance carriers to get volume discounts on insurance. But in recent years, as indemnity insurance has grown more expensive than managed care, many companies with young, healthy employees have left those association plans. That, in turn, has caused insurers to jack their rates up further.
Chambers of commerce receive royalties from the carriers, and most are reluctant to interfere with that stable source of income, notes Kevin Haugh of the Institute for Health Policy Solutions, in Washington, D.C. But there are exceptions. For instance, Connecticut's CBIA, a group similar to a chamber of commerce, created a multicarrier alliance but also kept its Aetna association program, which covers 5,000 small and midsize companies. In the MinneapolisÑSt. Paul area, the Minnesota Chamber of Commerce and the Employers' Association have a joint contract with Medica Health Plans, a local HMO, for a batch of managed-care plans. They've obtained a 6.5% annual rate cap and the same health-promotion program that Medica offers large employers. One chamber program stands in the forefront of the alliance movement. The 24-year-old Council of Smaller Enterprises (COSE) of the Cleveland Chamber of Commerce boasts about 230,000 enrollees from 13,500 companies with 150 or fewer workers. Employees of those businesses can choose from among 13 different plans offered by Blue Cross and Blue Shield of Ohio, as well as two Kaiser Permanente HMOs. Last year COSE's premiums went up only 2.5%, compared with a 6.5% average increase for small businesses in the Midwest. Now several other Ohio chambers are following COSE's lead, spurred on by the state's removal of legal obstacles.
Other states have taken an active role in launching small-business coalitions. California, for instance, has established the statewide Health Insurance Plan of California (HIPC) for companies with 3 to 50 employees. Activated in August 1993, it now includes about 100,000 workers and dependents from 5,800 companies, including Flowers by Adelaide Inc., in San Diego. (See"Before and After," below.) The employees have a choice of up to 24 health plans, mostly HMOs, and the carriers' rates dropped an average of 5% last year.
The HIPC used its buying power to negotiate that reduction, but the ability of employers and workers to compare standardized plans within the pool also has forced insurers to compete on price. Florida's 10 regional Community Health Purchasing Alliances (CHPAs), which aren't legally authorized to bargain with carriers, have relied on that strategy to lower prices for their members. On the whole, it seems to be working. Average rates among the 40 carriers within the CHPAs are about 10% to 25% lower than charges for similar plans outside the pools. And in their first 18 months, the CHPAs signed up more than 15,000 companies with 50 or fewer workers.
If there's a purchasing alliance in your area, how do you join it, and how does it work? How do you know whether it will save you money?
Joining most of the coalitions is simple: you either ask your insurance agent about them or call the alliance directly. (For a list of some numbers to call, below.) California's HIPC lets you choose between enrolling on your own and using a broker. In Florida and Connecticut, you must sign up through an agent, although the coalitions will send you information and connect you with a participating broker. COSE will put you in touch with a Blue Cross or Kaiser salesperson.
Most alliances charge an annual membership fee ranging from $100 to a few hundred dollars, plus a low monthly administration fee for each covered person. They handle most of the paperwork. Except during enrollment periods, all the employer has to do is send a single monthly check to the alliance, which distributes the money among the appropriate carriers. The alliances require business owners to pay part of their workers' premiums, but that amount can be as low as half the cost of the coalitions' least-expensive plans.
Whether you can cut costs by joining an alliance depends largely on how healthy your workers are and on how competitive your local insurance market is. Over the past year or two, small-group rate increases have leveled off in most areas, and HMOs have become much more accessible to small employers. So you might find that it costs no more to get decent insurance outside an alliance than inside it.
Many states have adopted some form of "community rating," which limits or bars rate variations based on health risk. Those laws have impeded the ability of some purchasing groups to compete on price. In Florida, for instance, small-group rates for identical plans must be determined solely on the basis of sex, age, family status, tobacco use, and geographic area. Moreover, insurers and HMOs are required to sell certain policies to all companies with 50 or fewer employees. In practice, many Florida carriers still ignore very small businesses. But price competition in that sector has heated up, partly because of the CHPAs' effect on the market. Terry McCorvie, head of the Orlando CHPA, hopes that the pool's administrative efficiency will keep its rates relatively low.
The phase-in of health-care reform has also affected California's HIPC. Its use of modified community rating has made its plans cheaper for many companies than risk-rated policies outside the alliance are. But in July the state will cut the range of variability in health-risk rating from 40% to 20%. As a result, groups with fewer healthy members won't save as much by joining the HIPC. On the other hand, groups with more healthy members will have a greater reason to enroll, notes Richard Figueroa, deputy director of the state Managed Risk Medical Insurance Board, which runs the alliance. "If price is less of an issue, employers are much more likely to go with us to pick up the choice of plans," he contends.
Most alliances consider employee choice their best drawing card. "If employers can obtain good coverage for the same or a bit less than they've been paying, and they can also get a choice of several managed-care networks, they feel it's an extra benefit for their employees," notes Nancy DeGroff, vice-president of insurance for Connecticut's CBIA.
The CBIA includes some of the state's largest companies. Big-business coalitions in Texas and Colorado have spun off purchasing groups for small companies. The Houston Healthcare Purchasing Organization (HHPO), for instance, persuaded the John Alden Life Insurance Co. to organize such an alliance and offer it a range of major-medical plans. Piggybacking on the rates that the corporate group has negotiated with area doctors and hospitals, Alden has been able to offer competitive prices, and 2,500 companies joined the alliance in its first nine months.
Why did the big companies in the HHPO extend a helping hand to small employers? According to HHPO president Ralph Smith, they wanted to build a larger, more potent coalition. Also, as small businesses flee the insurance market, he notes, big corporations are forced to assume more of the cost of uninsured care. "As you get more people insured, you lessen the burden overall," he says.
Ken Terry (firstname.lastname@example.org) is a senior editor at Medical Economics, a magazine for practicing physicians.
HEALTH-INSURANCE BUYING GROUPS
Your state's department of insurance can tell you if there's an alliance in your area.
Caroliance, North Carolina: 800-873-6464
Cincinnati Chamber of Commerce: 513-579-3100
Cooperative for Health Insurance Purchasing, Denver: 800-996-CHIP
Council of Smaller Enterprises, Cleveland: 800-562-7121
Employers Health Purchasing Cooperative, Bellevue, Wash.: 206-646-4302
Florida CHPAs: 800-4MY-CHPA
Independent Health Alliance of Iowa: 515-223-7790
John Alden Life Insurance, Houston: 800-444-7322
Kentucky Health Purchasing Alliance (PlanSource): 800-677-7323
Long Island Association Health Alliance: 516-499-4400
Minnesota Business Coalition: 612-644-9702
Texas Insurance Purchasing Alliance: 800-TEX-TIPA
BEFORE AND AFTER:
One Company's Health-Care Switch
Flowers by Adelaide Inc.
Florist and greenhouse in San Diego; $3 million in annual sales; 40 employees, 25 with health-care coverage through the company
Old Health Plan
Insurer: Aetna Choice HMO
Percentage paid by employer: 50% for first year, 100% thereafter
Annual company cost per employee: $2,136
Last rate change: 5% increase
New Plan, in Alliance*
Insurer: Employees chose 5 HMOs from regional menu of 10 HMOs and two PPOs
Percentage paid by employer: 50% of the lowest-cost plan among the 12 for first year, 100% thereafter
Annual company cost per employee (including alliance fees): $1,590
last rate change: 25% decrease, largely because of steep drop in rates of Kaiser Permanente HMO
*THE ALLIANCE: The Health Insurance Plan of California (HIPC). Number of carriers: 22 HMOs, two PPOs (statewide total). Number of employees in member companies: 3 to 50. Number of companies in alliance: 5,800. Number of workers and dependents covered: 105,000. How companies join the HIPC: directly or through insurance agents. Membership fees: $20 per company per month, $2.50 per enrollee per month. Percentage of premium employers must pay: 50% of lowest-cost plan offered in area.
WILL THE ALLIANCES SURVIVE?
The survival of small-business purchasing alliances depends partly on the insurance companies. While some insurers and HMOs are doing a good business with buying groups, others are ignoring or actively undermining them. Some Florida carriers, for instance, have paid agents lower commissions for selling alliance policies than for doing business outside the pools. In Kentucky, insurance companies backed failed legislation to repeal the health-care reforms that included that state's fledgling alliance. And the Illinois Chamber of Commerce's attempt to create a small-employer coalition foundered last year after most insurers declined to participate.
Stiff competition has nearly done in the Independent Health Alliance of Iowa (IHAI), which was started two years ago by independent insurance agents under a state charter. Last year the alliance cut its members' costs by 3%, while small-group rates in Iowa jumped 7% to 8%. But that was only because so many coalition members switched to HMOs before their peers outside the alliance did. Recently, as the market has shifted toward managed care, the competition has soared, and the pool's enrollment has stalled.
"Our growth is not what we hoped it would be, and that's partly because the marketplace is responding," observes Bob Skow, program director of the IHAI. "All of the carriers are lowering their prices, and they're all offering multiple-choice plans."
The alliances in California, Florida, Connecticut, and Ohio, however, have been undeniably successful. Although the differential between their prices and rates outside the pools is narrowing, some observers believe that the coalitions will look more attractive when market rates start rising again. In addition, bills now pending in Congress, if passed, would help the alliances bargain for lower rates and would preempt state laws that prevent alliances from being formed.
Whether the purchasing groups can endure and grow in such a hotly competitive environment is anyone's guess at this point. But one thing seems clear: if the alliances die, small employers will be worse off. States James Buckley, partner in charge of KPMG's New York City benefits practice, "I can assure you that once those insurance companies push an alliance out of the marketplace, their rates will go back up."