Health Plan Purchasing Cooperatives (HPPCs) and Reform of the Small Group Health Insurance Market

Small groups face special problems in purchasing health insurance. Among them, small employees are too small to spread the risks of high medical costs, to achieve economies of scale in administration , to manage competition among accountable health plans, the process needed to drive down costs, or to offer choices of health plan to individual subscribers. These problems doubtless contribute to the fact that the percentage of employees without employment-based health insurance is much higher in small groups that in large groups. Solutions to these difficult dilemmas are possible._x000B__x000B_This paper explores the problems faced by small groups in purchasing health insurance, describes the theory behind and the context within which we envision reforms and makes recommendations to resolve the problems of small groups. We recommend the establishment of health plan purchasing cooperatives (HPPCs) for self-employed persons and employees of businesses with 100 employees or fewer and their dependents. This group accounts for 55 percent of the population by some measures, more in some states._x000B__x000B_The HPPC is a pooled purchasing arrangement intended not only to spread risk and achieve economies of scale for small groups, but also to give access to members of small groups to the competitive process available to large groups to drive improvements in qualtiy, reductions in cost. The HPPC is the institution that creates and perfects the market for small groups, to small to perform these functions for themselves._x000B__x000B_The HPPC spreads risk over its entire sponsored population: each health plan over its own enrolled members (all of whom pay the same premium for the same coverage from any given plan), and, by risk adjustment, the HPPC spreads the risk among health plans. It achieves economies of scale in administration. The HPPC also sets and monitors compliance with rules governing employer behavior, such as underwriting and employer contribution. The HPPC “manages competition” in that is runs an annual enrollment process, standardizes the benefit package (unless state or federal government does that), publishes comparative information on price and quality in a form accessible to and relevant for local purchasers, and does the risk adjustment (unless a state agency does it)._x000B__x000B_The paper also discusses the problems with highly regulatory and voluntary HPPCs, and the advantages of individual choice of plan which the HPPC allows. Finally, we explore the difficult issues around governance of these new entities._x000B__x000B_The HPPC should be a “demand side’ advocate, representing the interests of employers, employees, and other covered people. It should actively monitor what is happening, and devise additional procompetitive market-perfecting strategies if health plan or employer behavior makes that necessary. The HPPC is a “price taker,” not a”price maker.” It does not negotiate prices in the sense that it refuses to deal if the price is not right. That is for price-conscious consumers to judge. Finally, HPPCs should not be seen as a regulatory agency, controlling either prices or allocation of capital. Price controls do not work to reduce costs to consumers. Given a spending limit, participants would spend the maximum allowed to ensure future spending rights and would apply political pressure to get the maximum increased. Furthermore, when capital flows through agencies controlled by politicans, the allocation of capital turns into wasteful “pork barrel,” allocated to serve the electoral needs of politicans rather than the needs of patients.