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Health Tracking

FROM THE FIELD

Consumer-Choice Purchasing Pools: Past Tense, Future Perfect?

Consumer-choice pools’ failure to gain enrollment thus far has been a result of lack of enthusiasm and, in some cases, resistance from agents and health plans. The good will of agents is critical because, as Long and Marquis document, agents are small employers’ primary source of information on insurance matters. But the concept of consumer-choice pools was originally advanced in the context of larger health system reform proposals that saw pools, in part, as a mechanism to reduce costs by eliminating items such as agents’ commissions. It is not surprising, therefore, that some brokers and agents saw pools as a threat to their business and refused to promote them.³

Without participation by health plans, particularly well-known ones, pools do not have an attractive product to offer. Mark Hall and his colleagues note health plans’ natural reluctance to go along with efforts to combine small purchasers into bigger ones with the clout to bargain on price.⁴ It is not surprising that plans resist offering lower prices through pools: If they did, employer groups that plans now serve through direct, exclusive contracts would have an incentive to use the purchasing pool instead, where the plans would have to compete for enrollment worker by worker.⁵

We agree that in the absence of significant subsidies to reduce the cost of coverage for uninsured businesses and workers, it was simply unrealistic to expect purchasing pools to lower prices enough to increase coverage rates among small businesses. However, purchasing pools that offer workers choice among competing health plans do have a future. Such pools offer a venue for expanding coverage to uninsured workers that is more promising than are the other alternatives under discussion. Pools are a workable way to offer individual choice of health plans while maintaining the economies and grouping advantages of employment-based coverage.

Consumers’ frustration with managed care has led, on the one hand, to demands for stronger regulation of health plans and, on the other, to a growing demand for individual choice, so that those dissatisfied with the plan chosen by their employer can change carriers.

This "managed care backlash" results at least in part from the lack of worker choice observed by Long and Marquis. Further, as prior research has shown, simply offering consumers the option to go out of the network for service (as point-of-service, or POS, plans do) is not a remedy for such dissatisfaction.⁶ In part this is doubtless because out-of network service often results in excessive balance billing. Simply having a choice among products offered by a single carrier also seems an inadequate solution.⁷ Even in far less personal matters, U.S. consumers enjoy and value the ability to "vote with their feet" when they feel mistreated. Imagine the reaction if most workers could use only one bank, chosen by their employer, and if they were dissatisfied, their only option was a different type of account from the same bank.

Use of individual health insurance policies has been touted as a way to free consumers from the constraints of employer-chosen plans while helping the uninsured to afford coverage. But knowledgeable observers rightly worry about incentives for employers to "cash out" health benefits if large individual tax credits or public program expansions were made available (only) in lieu of employer based coverage. While employer plans spread the costs of older and sicker workers across their entire group, risk fragmentation problems in the individual market could leave many such workers unable to afford coverage.⁸ Moreover, unless the tax credits were much larger than in the leading proposals to date, the net consumer price for health insurance would be much greater than current contribution requirements for many workers.⁹ Younger, healthier workers might well decide they have better uses for the additional cash.¹⁰ An increase in the number of uninsured and a spiraling disintegration of health insurance coverage would be the likely results.

As these dynamics are better understood by interest groups and policymakers who seek individual choice of plans, it is hoped that they will seek alternative approaches that better avoid these downside risks.¹¹

Market Trends And Consumer Choice

 
Many public-employee and large-employer health benefit programs already offer workers a choice among an array of participating plans, and if the current discussion of "defined-contribution" approaches leads to any real action, more large employers may do so through outsourcing arrangements. Individual small businesses, however, find it difficult if not impossible to do likewise. But offering choice to small-firm workers is exactly what consumer-choice purchasing pools are designed to do, and Long and Marquis’s research shows that they are doing so effectively.

Recent experience suggests that choice is becoming more attractive in the small employer market. Despite the demise of Florida’s Community Health Purchasing Alliances, which were seen as creatures of government and had virtually no latitude to act as purchasers, ongoing business-coalition pools offering choice are doing well. In Colorado, after several years of stable enrollment, the Alliance’s small-employer cooperative has seen enrollment grow by about 44 percent over the past year.¹² Reported reasons include growing interest among employers and agents in choice and in the customer-service capacity of a large sponsor, in the face of managed care company acquisitions and other market changes. The Colorado pool has improved agent relations through a responsive online quoting system and has also benefited from a change in one participating health plan’s agent-commission policy for its nonpool business.

In California, enrollment in the Health Insurance Plan of California (HIPC) plateaued after participating preferred provider organizations (PPOs) dropped out.¹³ But the new pool operator, the Pacific Business Group on Health, anticipates substantial growth in its renamed Pac Advantage program with the addition of new PPO options in the first quarter of 2000. Other changes include improved agent outreach and online rate quoting. In New York City, new comarketing efforts with other business organizations are expected to accelerate enrollment growth at the New York Business Group on Health’s new Health-Pass Program.

Use Of Public Subsidies

Top Market Trends And Consumer... Use Of Public Subsidies The Kansas Initiative NOTES

 
Another factor that could affect the future role of consumer-choice pools is the likelihood of other public subsidies for health insurance. insurance. In addition to tax incentives, expansion of public programs, such as the State Children’s Health Insurance Program (SCHIP), has been proposed to cover more children and more low-income parents. States such as Kansas, Connecticut, and Oregon are pursuing initiatives that would use consumer-choice pools to manage the flow of subsidy dollars on behalf of small-firm workers and their families and to make job-based coverage more available to workers in small, low-wage firms that traditionally do not offer health insurance.¹⁴

Pools have the administrative capability to combine public funds (whether tax credits or program funds, such as SCHIP) with employer contributions and forward them to the worker’s chosen health plan.¹⁵ Using pools in this way would minimize the administrative burden on small employers, who would only have to deal with one source of health insurance coverage and write one monthly check. States would find it much easier to meet the extensive federal requirements involved in using SCHIP funds to "buy in" to employment based coverage by working with pools rather than with individual employers or health plans. Small-firm workers could sign up for health insurance at their workplace—a convenience that most insured Americans already enjoy and value—and choosing their preferred health plan would be easy. Families would get coverage from a single plan, which makes it more likely that parents would know how to get care for their children.¹⁶

Because they would serve all of a small firm’s workers regardless of their subsidy status, pools also would provide a stable source of coverage for a population whose earnings and eligibility for tax credits and other subsidies, such as SCHIP, may vary greatly over short periods of time. Thus, family could remain enrolled in the same health plan, even while the source(s) of payment payment for that coverage varied. Finally, pools’ benefit structure and administrative capacity make risk adjustment, thought by many to be an important adjunct of individual choice, much more workable than in the individual marketplace.¹⁷

The potential new enrollment represented by persons receiving public subsidies should help to overcome the chief obstacle to the growth of consumer-choice pools in the current marketplace: health plans’ reluctance to participate in them. Employer groups are attractive to plans for the simple reason that workers receive large "subsidies" (employer contributions) that they cannot use to buy insurance elsewhere. If tax credits or other public subsidy amounts were sufficiently large, and if they could only be used toward coverage purchased through a consumer-choice pool, then small-business pools would be the only way in which health plans could reach a substantial new, largely healthy, population; thus, plans would be motivated to contract with them.

Such a scenario seems within the realm of possibility. The potpourri of legislative proposals to encourage creation of group purchasing organizations (noted by Hall and colleagues) indicates that the general concept has broad bipartisan appeal. Moreover, as mentioned earlier, states are already moving to use consumer-choice pools to expand job linked coverage for low-wage workers and families. These states have two goals: to encourage career development and increase low-income workers’ attachment to work (rather than welfare), and to strengthen, rather than undermine, employment-based coverage generally.

The Kansas Initiative

Top Market Trends And Consumer... Use Of Public Subsidies The Kansas Initiative NOTES

 
Kansas has enacted a new initiative to meet uninsured small-firm workers’ needs through a private purchasing pool. The bill was unanimously approved in the state senate and adopted by a wide bipartisan margin in the House.¹⁸ Gov. Bill Graves (R) has appointed committee, chaired by a private businessman, that includes Sen. Sandy Praeger(R), the sponsor of the legislation, and Insurance Commissioner Kathleen Sebelius (D). The committee will select a private nonprofit employer organization to serve as the Kansas Business Health Partnership and will develop subsidy schedules for low-wage small-firm workers. Unlike the original Florida and California programs, the partnership will be neither created nor run by the state; however, it will coordinate with the state with respect to state subsidies. The partnership will offer employee choice of competing health plans, minimize administrative burden for participating employers, and, for SCHIP-eligible children, offer benefit plans that meet SCHIP requirements. State agencies are to coordinate Medicaid and SCHIP funds for eligible dependents of participating small-firm workers. Legislative leaders indicate that they plan to appropriate funds to subsidize low-wage workers and their small firms, which they acknowledge will be critical to the partnership’s success.

The partnership will be available to all small Kansas firms and will have the latitude as a private purchaser to structure its offerings and operate in a manner that is viable in the private market. A number of health plans have indicated their desire to participate in this new initiative, which has strong support from the business community.¹⁹ Other states are interested in this approach as well: Both Connecticut and Oregon state officials are investigating investigating similar initiatives with their business and industry associations’ consumer-choice pools.

The successful business-sponsored consumer-choice small-employer pools in California, Colorado, and Connecticut are not, in our view, simply anomalies. Their evolving operations and new initiatives such as the one now developing in Kansas show that the consumer-choice pool construct has the potential to play an important role in improving access to health insurance for working Americans.

Editor's Notes

 
Rick Curtis is president, Ed Neuschler is senior program officer, and Rafe Forland is senior analyst at the Institute for Health Policy Solutions in Washington, D.C. Health Affairs invited their response to the Market Watch papers by Steve Long and Susan Marquis and by Mark Hall, Elliot Wicks, and Janice Lawlor, which precede this paper.

NOTES

Top Market Trends And Consumer... Use Of Public Subsidies The Kansas Initiative NOTES

 

1. S.H. Long and M.S. Marquis, "Have Small-Group Health Insurance Purchasing Alliances Increased Coverage?" Health Affairs (Jan/Feb 2001): 154–163.
2. Ibid; J.M. Yegian et al., "The Health Insurance Plan of California: The First Five Years," Health Affairs (Sep/Oct 2000): 158–165; and T.C. Buchmueller, "Managed Competition in California’s Small-Group Insurance Market," Health Affairs (Mar/Apr 1997): 218–228.
3. This sentiment may be becoming less common. As Long and Marquis note, pools have recognized the importance of agents and are working hard to maintain a good business relationship with them. In our experience, this is true of all existing pools.
4. M.A. Hall, E.K. Wicks, and J.S. Lawlor, "Health-Marts, HIPCs, MEWAs, and AHPs: A Guide for the Perplexed," Health Affairs ( Jan/Feb 2001): 142–153.
5. We also believe that many plans do not want to cede to pools administrative functions associated with their traditional business roles, such as premium collection and enrollment processing.
6. See, for example, R. Ullman et al., "Satisfaction and Choice: A View from the Plans," Health Affairs (May/June 1997): 209–217.
7. The value and importance of consumer choice, as envisioned in the original managed competition concept, was greatly mitigated by the unanticipated development of largely overlapping provider networks. To a large degree, this resulted from many employers’ demand for broad networks under exclusive contracts. Large employers’ more recent interest in employee-choice and defined-contribution approaches will probably change this dynamic. Moreover, in the face of renewed cost escalation, health plan and provider price negotiation is reportedly leading to a narrowing of provider networks in California and other parts of the country. This may result in improved capacity for cost and care management as well as demand for employee choice of competing plans.
8. Individual health insurance markets are characterized by high turnover and high average medical costs, risk segmentation, aggressive underwriting, and competition among carriers based on risk selection. These interrelated problems lead to high overhead costs and large variations in premiums based on health status and therefore make it unlikely that using tax credits or other subsidies to purchase coverage through those markets would be a cost-effective means of covering uninsured workers and dependents.
9. While economists variously estimate the price elasticity of health insurance, they all agree that a higher price means fewer purchasers. The "Catch-22" here is that making individual tax credits larger simply increases the incentive for employers to stop sponsoring coverage.
10. "Cashing out" benefits implies (but does not require) that employers use their savings to increase the wages of affected workers.
11. Some proponents of individual tax credits as a free-market mechanism to cover the uninsured predict that a variety of voluntary pools will emerge. Suggested sponsors include civic groups, churches, and the like. Individuals would presumably be free to join and benefit from these pools. But such pools would almost certainly be doomed simply because they do not constitute a "natural group" with cohesion and stability. That is, individuals could leave the pool at will and would be likely to do so when they could obtain a better price elsewhere. With large employer–based coverage, stability and cohesion result from the fact that a significant contribution is generally not available unless a worker participates in that employer’s plan. Thus, leaving the plan means forgoing a significant benefit.
12. Enrollment grew from 19,135 lives in November 1999 to 27,503 lives in November 2000. David Gregory, chief executive officer of the Alliance’s Cooperative for Health Insurance Purchasing, personal communication, 20 November 2000.
13. For a discussion of the importance of PPO options to enrollment, see Yegian et al., "The Health Insurance Plan of California."
14. The pools would continue to serve the entire small-business market, but public subsidies would be focused on low-income workers and families and/or low-wage small businesses.
15. This administrative capacity of pools will be especially valuable if, as seems likely, the new Congress adopts both tax incentives and public program expansion.
16. Low-income uninsured children are eligible to enroll in SCHIP, but not their parents. In the absence of the right kind of administrative mechanism, such as a purchasing pool, new tax incentives might help the parents to enroll in employment-based coverage, while the children remained enrolled in the separate public program. Consider, for example, a typical family at 185 percent of the federal poverty level. The children are eligible for SCHIP coverage for a full year; one parent works seasonally at low wages and is eligible for a modest employer contribution for six months of the year and (we postulate) for a tax credit during the other half of the year; and the other parent is a full-year low-wage worker but has no employer coverage and is therefore eligible for a tax credit throughout the year. Without some new sponsor that can manage multiple funding sources, the proposed tax credits would simply exacerbate the fragmentation of funding sources for family members’ health insurance.
17. For a discussion of risk adjustment in California’s HIPC, see Yegian et al., "The Health Insurance Plan of California."
18. Kansas Senate Bill (SB) 668 was adopted in late April 2000.
19. An earlier private effort in Kansas to develop a consumer-choice purchasing program got the participation of only one health plan, which then agreed to offer worker choice of products through the program. Whether health plans’ expressed interest in the new partnership will actually translate into participation and support (one major plan has expressed opposition) very likely depends on whether funding is made available for uninsured low-wage workers.

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