Small companies that band together can save big on health insurance -- but only if they know how

Imagine this: Thousands of small businesses in an area get together to buy health insurance. For once, their representatives have the clout to negotiate prices the way large companies do. Instead of being the customers insurers love to hate, the small-business group becomes a valued client, too big to ignore.

In Cleveland, that's happened. The Council of Smaller Enterprises (COSE), which is a division of the Greater Cleveland Growth Association (Cleveland's chamber of commerce), is the largest purchaser of group health insurance in Ohio. It is often applauded as a model of what small businesses can do to control health-care costs.

Unfortunately, entrepreneurs don't spontaneously form groups of 8,000 to buy health insurance. If we want more COSEs -- and there are good reasons that we should -- applause is not enough. We also need to take a good, hard look at what it takes to make such coalitions work.

The potential payoffs are high. Between 1984 and 1990, COSE's rates rose a total of only 34.5%, at a time when health-insurance costs for small employers increased 154% in Cleveland. (COSE executive director John Polk expects that this year's increase in July will be the first in six years to be in double digits.) Today the group offers 12 plans to some 8,000 Cleveland-area companies, with 145,000 employees and dependents. On January 1 COSE launched its first affiliate plan, through the Toledo Chamber of Commerce. "The program is very cost-effective," says Donald Stallard, chief executive of The Reserves Network, an Inc. 500 company with 28 employees. He estimates that COSE saves his company 25% to 40% on health insurance.

What's the secret? Active plan management. It's a lesson COSE learned the hard way. When COSE started a health plan, in 1973, it was typical of the insurance that associations routinely offer. All members received a 10% discount with Blue Cross & Blue Shield of Ohio because of their COSE affiliation -- and that was it. Because the plan accepted all members at the same price, it attracted older, sicker people. Claims went way up -- as did prices. Be-tween 1978 and 1982 some COSE premiums rose as much as 130%.

In 1982 COSE decided to change. Today, like most insurers, the organization will not accept all applicants. About 15% of the groups that apply are turned down because they contain too many high-risk prospects or because they don't meet other eligibility standards. Older people pay more, and groups whose claims well exceed their premium dollars must pay a 35% surcharge until their record improves. A COSE subsidiary handles billing and enrollment, and has developed an annual audit program to ensure that company owners are abiding by enrollment rules (for example, not adding ineligible family members).

Those changes have made COSE's plans much more desirable to insurers. As a result, the coalition has been able to get more competitive rates from Blue Cross, its primary provider. As an active administrator, COSE also has much more information about its plans -- and that allows it to negotiate aggressively at rate-increase time.

Such active management requires insurance expertise, but most associations and chambers have limited staffs. They are no more likely than any small company to have special knowledge of health insurance -- or the desire to develop it. In other words, there's nothing automatic about associations developing aggressive group plans. Someone has to take the lead.

Then there's the issue of scale. Insurers dislike small groups because there's no way to predict a given small group's claims statistically. So a coalition must have a certain critical mass -- at least 1,000 people -- before it becomes truly attractive to insurers. Because COSE is one of the largest small-business councils of any U.S. chamber, it quickly achieved the numbers needed to acquire leverage.

Finally, COSE has a close relationship with the local Blue Cross. Even Polk admits that the council couldn't readily duplicate its program in other states, because it doesn't have such a cooperative relationship with other insurers. By giving favorable terms to COSE from the start, Blue Cross & Blue Shield of Ohio has won market share -- but only by ceding much negotiating power to a formerly weak and fragmented group of customers.

Still, if a coalition can grow big enough, insurers will become noticeably more cooperative. Ree Sailors can testify to that. She is executive director of Florida Health Access Corp., a state program trying to create a purchasing group of small businesses that previously had no insurance. (For the first few years, Florida will subsidize about one-third of the cost; the idea is that once the group grows large enough, the subsidies can be phased out.) When Florida Health Access started in Tampa, nearly two years ago, Sailors could get only one health maintenance organization to make a serious offer. Because the program now has more than 1,000 member companies, Sailors got much more insurer interest when the program recently expanded to Orlando. "Initially, we really had to cajole people to the negotiating table," she says. "Now they're beginning to vie for our business."

Coalitions have to overcome other obstacles as well -- such as insurance regulations in some states. Purchasing groups aren't a panacea, either: even with them, costs continue to rise too fast, and some small companies still can't get insurance. However, the groups do help put smaller businesses on an equal insurance footing with their larger competitors -- and the alternatives aren't pretty.